Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:  September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas
 
75-2508900
(State or other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1410 Lakeside Parkway, Suite 200, Flower Mound, Texas
 
75028
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, including Area Code:  (972) 471-7400
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company x
Emerging Growth Company ¨

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x 

As of October 31, 2018, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share, was 2,381,244.




MANNATECH, INCORPORATED
TABLE OF CONTENTS
Part I – FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
Part II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

Special Note Regarding Forward-Looking Statements

Certain disclosures and analyses in this Form 10-Q, including information incorporated by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 that are subject to various risks and uncertainties. Opinions, forecasts, projections, guidance, or other statements other than statements of historical fact are considered forward-looking statements and reflect only current views about future events and financial performance. Some of these forward-looking statements include statements regarding:
management’s plans and objectives for future operations;
existing cash flows being adequate to fund future operational needs;
future plans related to budgets, future capital requirements, market share growth, and anticipated capital projects and obligations;
the realization of net deferred tax assets;
the ability to curtail operating expenditures;
global statutory tax rates remaining unchanged;
the impact of future market changes due to exposure to foreign currency translations;
the possibility of certain policies, procedures, and internal processes minimizing exposure to market risk;
the impact of new accounting pronouncements on financial condition, results of operations, or cash flows;
the outcome of new or existing litigation matters;
the outcome of new or existing regulatory inquiries or investigations; and
other assumptions described in this report underlying such forward-looking statements.
Although we believe that the expectations included in these forward-looking statements are reasonable, these forward-looking statements are subject to certain events, risks, assumptions, and uncertainties, including those discussed below, the “Risk Factors” section in Part I, Item 1A of our Form 10-K for the year ended December 31, 2017, and the “Risk Factors” section in Part II, Item 1A of this Form 10-Q, and elsewhere in this Form 10-Q and the documents incorporated by reference herein. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results and developments could materially differ from those expressed in or implied by such forward-looking statements. For example, any of the following factors could cause actual results to vary materially from our projections:
overall growth or lack of growth in the nutritional supplements industry;
plans for expected future product development;
changes in manufacturing costs;
shifts in the mix of packs and products;
the future impact of any changes to global associate career and compensation plans or incentives or the regulations thereto;
the ability to attract and retain independent associates and preferred customers;
new regulatory changes that may affect operations, products or compensation plans or incentives;
the competitive nature of our business with respect to products and pricing;
publicity related to our products or network-marketing; and
the political, social, and economic climate of the countries in which we operate.
Forward-looking statements generally can be identified by use of phrases or terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “projects,” "hopes," “potential,” and “continues” or other similar words or the negative of such terms and other comparable terminology. Similarly, descriptions of Mannatech’s objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. Readers are cautioned when considering these forward-looking statements to keep in mind these risks, assumptions, and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speak only as of the date of this report.

Unless stated otherwise, all financial information throughout this report and in the Consolidated Financial Statements and related Notes include Mannatech, Incorporated and all of its subsidiaries on a consolidated basis and may be referred to herein as “Mannatech,” “the Company,” “its,” “we,” “us,” “our,” or “their.”

Our products are not intended to diagnose, cure, treat, or prevent any disease, and any statements about our products contained in this report have not been evaluated by the Food and Drug Administration, also referred to herein as the “FDA”.

1

Table of Contents

 PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
September 30, 2018
(unaudited)
 
December 31, 2017
Cash and cash equivalents
$
25,678

 
$
37,682

Restricted cash
1,514

 
1,514

Accounts receivable, net of allowance of $726 and $582 in 2018 and 2017, respectively
124

 
273

Income tax receivable

 
907

Inventories, net
12,711

 
9,385

Prepaid expenses and other current assets
3,570

 
2,607

Deferred commissions
3,124

 
3,880

Total current assets
46,721

 
56,248

Property and equipment, net
6,231

 
3,537

Construction in progress
638

 
777

Long-term restricted cash
7,268

 
7,565

Other assets
3,828

 
3,876

Long-term deferred tax assets, net
4,455

 
4,239

Total assets
$
69,141

 
$
76,242

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Current portion of capital leases
$
74

 
$
228

Accounts payable
6,402

 
6,008

Accrued expenses
6,617

 
5,771

Commissions and incentives payable
11,489

 
9,658

Taxes payable
3,925

 
2,404

Current notes payable
802

 
815

Deferred revenue
6,960

 
8,561

Total current liabilities
36,269

 
33,445

Capital leases, excluding current portion
92

 
144

Long-term deferred tax liabilities
1,103

 
1,147

Long-term notes payable
1,009

 

Other long-term liabilities
2,796

 
1,265

Total liabilities
41,269

 
36,001

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding

 

Common stock, $0.0001 par value, 99,000,000 shares authorized, 2,742,857 shares issued and 2,381,244 shares outstanding as of September 30, 2018 and 2,742,857 shares issued and 2,702,940 shares outstanding as of December 31, 2017

 

Additional paid-in capital
33,859

 
34,928

Retained earnings (deficit)
(3
)
 
4,190

Accumulated other comprehensive income
4,227

 
5,984

Treasury stock, at average cost, 361,613 shares as of September 30, 2018 and 39,917 shares as of December 31, 2017
(10,211
)
 
(4,861
)
Total shareholders’ equity
27,872

 
40,241

Total liabilities and shareholders’ equity
$
69,141

 
$
76,242

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED)
(in thousands, except per share information)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
43,014

 
$
41,997

 
$
129,534

 
$
130,324

Cost of sales
9,037

 
8,233

 
25,426

 
25,781

Gross profit
33,977

 
33,764

 
104,108

 
104,543

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Commissions and incentives
18,054

 
18,370

 
54,361

 
54,445

Selling and administrative expenses
8,111

 
8,171

 
25,706

 
26,803

Depreciation and amortization expense
475

 
424

 
1,521

 
1,379

Other operating costs
5,667

 
6,115

 
22,086

 
20,447

Total operating expenses
32,307

 
33,080

 
103,674

 
103,074

 
 
 
 
 
 
 
 
Income from operations
1,670

 
684

 
434

 
1,469

Interest income
50

 
10

 
212

 
58

Other income (expense), net
(83
)
 
177

 
681

 
209

Income before income taxes
1,637

 
871

 
1,327

 
1,736

 
 
 
 
 
 
 
 
Income tax benefit (provision)
(3,300
)
 
510

 
(3,637
)
 
193

Net income (loss)
$
(1,663
)
 
$
1,381

 
$
(2,310
)
 
$
1,929

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 

 
 

 
 

 
 

Basic
$
(0.69
)
 
$
0.51

 
$
(0.89
)
 
$
0.71

Diluted
$
(0.69
)
 
$
0.50

 
$
(0.89
)
 
$
0.69

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 

 
 

 
 

 
 

Basic
2,396

 
2,711

 
2,595

 
2,708

Diluted
2,396

 
2,766

 
2,595

 
2,773


MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – (UNAUDITED)
(in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(1,663
)
 
$
1,381

 
$
(2,310
)
 
$
1,929

Foreign currency translations
(65
)
 
80

 
(1,757
)
 
1,728

Comprehensive income (loss)
$
(1,728
)
 
$
1,461

 
$
(4,067
)
 
$
3,657

 
See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)

 
Common stock
Par value
 
Additional
paid in
capital
 
Retained
earnings (deficit)
 
Accumulated
other
comprehensive
income
 
Treasury
stock
 
Total
shareholders’
equity
Balance at December 31, 2017
$

 
$
34,928

 
$
4,190

 
$
5,984

 
$
(4,861
)
 
$
40,241

Net loss

 

 
(2,310
)
 

 

 
(2,310
)
Payment of cash dividends

 

 
(1,883
)
 

 

 
(1,883
)
Charge related to stock-based compensation

 
765

 

 

 

 
765

Issuance of unrestricted shares

 
(1,821
)
 

 

 
2,065

 
244

Stock option exercises

 
(13
)
 


 


 
28

 
15

Repurchase of common stock

 

 

 

 
(7,443
)
 
(7,443
)
Foreign currency translations

 

 

 
(1,757
)
 

 
(1,757
)
Balance at September 30, 2018
$

 
$
33,859

 
$
(3
)
 
$
4,227

 
$
(10,211
)
 
$
27,872


See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)
(in thousands)
 
Nine Months Ended
September 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$
(2,310
)
 
$
1,929

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
1,521

 
1,379

Provision for inventory losses
495

 
424

Provision for doubtful accounts
410

 
253

Loss on disposal of assets

 
1

Charge related to stock-based compensation
1,009

 
444

Deferred income taxes
(261
)
 
(853
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(261
)
 
(339
)
Income tax receivable
907

 
(1,169
)
Inventories
(3,821
)
 
1,161

Prepaid expenses and other current assets
17

 
1,040

Deferred commissions
756

 
(516
)
Other assets
50

 
550

Accounts payable
394

 
802

Accrued expenses and other liabilities
1,020

 
(272
)
Taxes payable
1,521

 
1,804

Commissions and incentives payable
1,832

 
1,853

Deferred revenue
(1,601
)
 
508

Net cash provided by operating activities
1,678

 
8,999

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Acquisition of property and equipment
(1,895
)
 
(1,076
)
Proceeds from sale of assets
62

 
1

Net cash used in investing activities
(1,833
)
 
(1,075
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from stock options exercised
15

 
83

Repurchase of common stock
(7,443
)
 
(145
)
Payment of cash dividends
(1,883
)
 
(1,015
)
Repayment of capital lease obligations
(1,115
)
 
(1,182
)
Net cash used in financing activities
(10,426
)
 
(2,259
)
Effect of currency exchange rate changes on cash and cash equivalents
(1,720
)
 
1,364

Net (decrease) increase in cash, cash equivalents, and restricted cash
(12,301
)
 
7,029

Cash, cash equivalents, and restricted cash at the beginning of the period
46,761

 
36,626

Cash, cash equivalents, and restricted cash at the end of the period
$
34,460

 
$
43,655

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 

 
 

Income taxes paid
$
381

 
$
1,625

Interest paid on capital leases and financing arrangements
$
38

 
$
54

Assets acquired through financing arrangements
$
2,281

 
$
130

See accompanying notes to unaudited consolidated financial statements.

5

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




    
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Flower Mound, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the NASDAQ Global Select Market under the symbol “MTEX”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products. We currently sell our products into three regions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).

On July 1, 2017, the Company revised its 2017 Associate Compensation Plan, which was designed to stimulate business growth and development for our active business building associates ("independent associates" or "associates") and to maximize the buying experience for our preferred customers. The 2017 Associate Compensation Plan provides revised income streams, new leadership levels and titles, and modified various volume requirements for our associates. In addition, the 2017 Associate Compensation Plan re-designated members as preferred customers and modified their pricing structure.

Associates and preferred customers purchase the Company’s products at published wholesale prices. The Company cannot distinguish products sold for personal use from other sales, when sold to associates, because it is not involved with the products after delivery, other than usual and customary product warranties and returns. Only associates are eligible to earn commissions and incentives. The Company operates a non-direct selling business in mainland China. Our subsidiary in China, Meitai Daily Necessity & Health Products Co., Ltd. (“Meitai”), is operating as a traditional retailer under a cross-border e-commerce model in China. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the Company’s consolidated financial statements and footnotes contained herein do not include all of the information and footnotes required by GAAP to be considered “complete financial statements”. However, in the opinion of the Company’s management, the accompanying unaudited consolidated financial statements and footnotes contain all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s consolidated financial information as of, and for, the periods presented. The Company cautions that its consolidated results of operations for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, 2017 consolidated balance sheet was included in the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2017 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 26, 2018 (the “2017 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2017 Annual Report.

Principles of Consolidation

The consolidated financial statements and footnotes include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in accordance with GAAP requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors. The Company continually evaluates the information used to make these estimates as the business and economic environment changes. Historically, actual results have not varied materially from the Company’s estimates and the Company does not currently anticipate a significant change in its assumptions related to these estimates. However, actual results may differ from these estimates under different assumptions or conditions.

The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered the most significant are described in this note to the consolidated financial statements, Organization and Summary of Significant Accounting Policies.


6

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includes in its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are received within 24 to 72 hours. As of September 30, 2018 and December 31, 2017, credit card receivables were $2.8 million and $2.0 million, respectively. As of September 30, 2018 and December 31, 2017, cash and cash equivalents held in bank accounts in foreign countries totaled $20.9 million and $30.6 million, respectively. The Company invests cash in liquid instruments, such as money market funds and interest bearing deposits. The Company also holds cash in high quality financial institutions and does not believe it has an excessive exposure to credit concentration risk.

A significant portion of our cash and cash equivalent balances were concentrated within the Republic of South Korea, with total net assets within this foreign location totaling $13.0 million and $32.7 million at September 30, 2018 and December 31, 2017, respectively. In addition, for the three and nine months ended September 30, 2018 and 2017, a concentrated portion of our operating cash flows were earned from operations within the Republic of South Korea.  An adverse change in economic conditions within the Republic of South Korea could negatively affect the Company’s results of operations.   

The Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) the Australia building lease collateral. As of September 30, 2018 and December 31, 2017, our total restricted cash was $8.8 million and $9.1 million, respectively.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows (in thousands):

 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents at beginning of period
$
37,682

 
$
28,687

Current restricted cash at beginning of period
1,514

 
1,510

Long-term restricted cash at beginning of period
7,565

 
6,429

Cash, cash equivalents, and restricted cash at beginning of period
$
46,761

 
$
36,626

 
 
 
 
Cash and cash equivalents at end of period
$
25,678

 
$
37,682

Current restricted cash at end of period
1,514

 
1,514

Long-term restricted cash at end of period
7,268

 
7,565

Cash, cash equivalents, and restricted cash at end of period
$
34,460

 
$
46,761


Accounts Receivable

Accounts receivable are carried at their estimated collectible amounts. Receivables are created upon shipment of an order if the credit card payment is rejected or does not match the order total. As of each of September 30, 2018 and December 31, 2017, receivables consisted primarily of amounts due from preferred customers and associates. As of September 30, 2018 and December 31, 2017, the Company's accounts receivable balance (net of allowance) was $0.1 million and $0.3 million, respectively. The Company periodically evaluates its receivables for collectability based on historical experience, recent account activities, and the length of time receivables are past due and writes-off receivables when they become uncollectible. As of September 30, 2018 and December 31, 2017, the Company held an allowance for doubtful accounts of $0.7 million and $0.6 million, respectively.

Inventories

Inventories consist of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs that approximate average costs) or net realizable value. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reserved or written off.


7

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Other Assets

As of September 30, 2018 and December 31, 2017, other assets were $3.8 million and $3.9 million, respectively. These amounts primarily consisted of deposits for building leases in various locations of $1.9 million as of September 30, 2018 and December 31, 2017. Additionally, included in the September 30, 2018 and December 31, 2017 balances was $1.7 million representing a deposit with Mutual Aid Cooperative and Consumer in the Republic of Korea, an organization established by the Republic of Korea’s Fair Trade Commission to protect consumers who participate in network marketing activities. Also included in the September 30, 2018 and December 31, 2017 balances was $0.2 million of indefinite lived intangible assets relating to the Manapol® powder trademark.

Notes Payable

Notes payable were $1.8 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively, as a result of funding from a capital financing agreement related to our investment in leasehold improvements, computer hardware and software and other financing arrangements. At September 30, 2018, the current portion was $0.8 million. At December 31, 2017, the current portion was $0.8 million.

Other Long-Term Liabilities

Other long-term liabilities were $2.8 million and $1.3 million as of September 30, 2018 and December 31, 2017, respectively.  As of September 30, 2018 and December 31, 2017, the Company recorded $0.2 million in other long-term liabilities related to uncertain income tax positions (see Note 7, Income Taxes, of the Company’s annual report on Form 10-K for the year ended December 31, 2017, filed March 26, 2018). Certain operating leases for the Company’s regional office facilities contain a restoration clause that requires the Company to restore the premises to its original condition. As of September 30, 2018 and December 31, 2017, accrued restoration costs related to these leases amounted to $0.3 million and $0.4 million, respectively.  At each of September 30, 2018 and December 31, 2017, the Company also recorded a long-term liability for estimated defined benefit obligation related to a non-U.S. defined benefit plan for its Japan operations of $0.4 million (see Note 9, Employee Benefit Plans, of the Company’s 10-K, filed March 26, 2018). As of September 30, 2018, the Company recorded $1.4 million in other long-term liabilities for lease incentives related to the corporate headquarters operating lease.

Revenue Recognition

The Company’s revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter and renewal packs. Substantially all of the Company’s product sales are made at published wholesale prices to associates and preferred customers. The Company records revenue net of any sales taxes and records a reserve for expected sales returns based on its historical experience. The Company recognizes revenue from shipped products when control of the product transfers to the customer, thus the performance obligation is satisfied. Corporate-sponsored event revenue is recognized when the event is held.
As a result of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017, the Company also collects associate fees, which relate to providing associates with the right to earn commissions, benefits and incentives for an annual period. Revenue from software tools included in the first contractual year is recognized over three months and revenue from associate fees is recognized over 12 months (see Contracts with Multiple Performance Obligations for recognition guidelines). Almost all orders are paid via credit card. See Note 9, Segment Information, for disaggregation of revenues by geographic segment and type.
The Company collected associate fees within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong and Taiwan since the implementation of the 2017 Associate Compensation Plan. Prior to the change, associates purchased packs that were bundles of products within these respective geographic markets.

Deferred Commissions

The Company defers commissions on (i) the sales of products shipped but not received by customers by the end of the respective period and (ii) the loyalty program. Deferred commissions are incremental costs and are amortized to expense consistent with how the related revenue is recognized. Deferred commissions were $3.9 million for the year ended December 31, 2017. Of this balance $2.2 million was amortized to commissions expense for the nine months ended September 30, 2018. At September 30, 2018, deferred commissions were $3.1 million.

8

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Deferred Revenue

The Company defers certain components of its revenue. Deferred revenue consisted of: (i) sales of products shipped but not received by customers by the end of the respective period; (ii) revenue from the loyalty program; (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event, and (iv) prepaid annual associate fees. At December 31, 2017, the Company’s deferred revenue was $8.6 million. Of this balance, $5.7 million was recognized as revenue for the nine months ended September 30, 2018. At September 30, 2018, the Company’s deferred revenue was $7.0 million.

Mannatech’s customer loyalty program conveys a material right to the customer as it provides the promise to redeem loyalty points for the purchase of products, which is based on earning points through placing consecutive qualified automatic orders. The timing and recognition of loyalty points has not changed with the adoption of Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). The Company factors in breakage rates, which is the percentage of the loyalty points that are expected to be forfeited or expire, for purposes of revenue recognition. Breakage rates are estimated based on historical data and can be reasonably and objectively determined. There have not been significant changes for the breakage estimate as a result of adopting ASC 606. The deferred revenue associated with the loyalty program at September 30, 2018 and December 31, 2017 was $4.7 million and $6.4 million, respectively.
Loyalty program
(in thousands)

Loyalty deferred revenue as of January 1, 2017
$
7,033

Loyalty points forfeited or expired
(5,895
)
Loyalty points used
(14,316
)
Loyalty points vested
17,836

Loyalty points unvested
1,748

Loyalty deferred revenue as of December 31, 2017
$
6,406

Loyalty deferred revenue as of January 1, 2018
$
6,406

Loyalty points forfeited or expired
(3,232
)
Loyalty points used
(9,092
)
Loyalty points vested
9,421

Loyalty points unvested
1,174

Loyalty deferred revenue as of September 30, 2018
$
4,677


Sales Refund and Allowances
The Company utilizes the expected value method, as set forth by ASC 606, to estimate the sales returns and allowance liability by taking the weighted average of the sales return rates over a rolling six-month period. The Company allocates the total amount recorded within the sales return and allowance liability as a reduction of the overall transaction price for the Company’s product sales. The Company deems the sales refund and allowance liability to be a variable consideration. The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC 606.
Historically, sales returns have not materially changed through the years, as the majority of our customers who return their merchandise do so within the first 90 days after the original sale. Sales returns have historically averaged 1.5% or less of our gross sales. For the nine months ended September 30, 2018 our sales return reserve consisted of the following (in thousands):
Sales reserve as of January 1, 2018
$
117

Provision related to sales made in current period
970

Adjustment related to sales made in prior periods
(11
)
Actual returns or credits related to current period
(875
)
Actual returns or credits related to prior periods
(106
)
Sales reserve as of September 30, 2018
$
95


9

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Contracts with Multiple Performance Obligations

Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations - a) the sale of the product and b) the loyalty program. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. The transaction price is allocated between the product sale and the loyalty program on a relative standalone selling price basis. Sales placed through a one-time order contain only the first performance obligation noted above - the sale of the product.

The Company provides associates with access to a complimentary three-month package for the Success TrackerTM and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations - a) the associate fee, whereby the Company provides an associate with the right to earn commissions, bonuses and incentives for a year, b) three months of complimentary access to utilize the Success Tracker™ online tool and c) three months of complimentary access to utilize the Mannatech+ online business tool. The transaction price is allocated between the three performance obligations on a relative standalone selling price basis. Associates do not have complimentary access to online business tools after the first contractual period.

With regards to both of the aforementioned contracts, the Company determines the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts.

Shipping and Handling Costs

The Company records inbound freight as a component of inventory and cost of sales. The Company records freight and shipping fees collected from its customers as fulfillment costs. In accordance with ASC 606-10-25-18a, freight and shipping fees are not deemed to be separate performance obligations as these activities occur before the customer receives the product.
Commissions and Incentives

Associates earn commissions and incentives based on their direct and indirect commissionable net sales over each month of the fiscal year. The Company accrues commissions and incentives when earned by associates and pays commissions on product and pack sales on a monthly basis.

Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s comprehensive income consists of the Company’s net income, foreign currency translation adjustments from its Japan, Republic of Korea, Taiwan, Denmark, Norway, Sweden, Colombia, Mexico and China operations, remeasurement of intercompany balances classified as equity in its Korea, Mexico and Cyprus operations, and changes in the pension obligation for its Japanese employees.

Recently Adopted Accounting Pronouncements

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, as of January 1, 2018. In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. This new standard requires companies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. Under the new standard, revenue is recognized when a customer obtains control of a good or service. The standard allows for two transition methods - entities can either apply the new standard (i) retrospectively to each prior reporting period presented or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date by one year to December 15, 2017 for fiscal years, and interim periods within those fiscal years, beginning after that date. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations (Reporting Revenue versus Net), in April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers, identifying Performance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, which provide additional clarification on certain topics addressed in ASU 2014-09. ASU 2016-08, ASU 2016-10, and ASU 2016-12 follow the same implementation guidelines as ASU 2014-09 and ASU 2015-14. All of these aforementioned ASUs have been codified under ASC 606. We adopted this standard on January 1, 2018 utilizing the modified retrospective approach applied to open contracts at the date of initial application. As the cumulative effect of applying the modified retrospective approach was immaterial, no adjustment was recorded to the opening balance of retained earnings. The timing of revenue recognition for our

10

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


various revenue streams was not materially impacted by the adoption of this standard. The Company believes its business processes, systems, and controls are appropriate to support recognition and disclosure under ASC 606. In addition, the adoption has led to increased footnote disclosures. The overall financial impact of adopting this standard did not have a material impact on our consolidated financial statements, financial condition, changes in financial condition or results of operations.

The Company adopted ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), during the first quarter of 2018. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash (Topic 230), which addresses the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendment requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. Restricted cash amounts are to be included with cash and cash equivalents when reconciling the beginning and ending amounts of cash on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. The adoption of this ASU did not have a material impact on our financial statements, financial condition, changes in financial condition or results of operations.

The Company adopted ASU 2017-09, Compensation, Stock Compensation (Topic 718), during the first quarter of 2018. In May 2017, the FASB issued ASU 2017-09, Compensation, Stock Compensation (Topic 718), to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard is required to be applied prospectively. The guidance was effective January 1, 2018, and the adoption of this ASU did not have a material impact on our financial statements, financial condition, changes in financial condition or results of operations.

Accounting Pronouncements Issued But Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are currently completing our analysis of the future impact of ASU 2016-02 on our consolidated financial position, results of operations and cash flows and remain on schedule to fully adopt this standard for 2019. The Company is still evaluating if this standard will have a material impact on its consolidated balance sheets, but does not expect adoption will have a material impact on its consolidated income statements. We expect the most significant impact will be the recognition of right-of-use assets and lease liabilities for operating leases.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220), which amended its standard on comprehensive income to provide an option for an entity to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the "TCJA") that was passed in December of 2017 from accumulated other comprehensive income (AOCI) directly to retained earnings.  The stranded tax effects result from the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement.  This is a one-time amendment applicable only to the changes resulting from the TCJA.  The standard will be effective for the Company on January 1, 2019, and may be reflected retroactively to any period in which the impacts of the TCJA are recognized.  The standard permits early adoption for any financial statements that have not been released as of the date of the revised standard. The overall financial impact of adopting this standard is unknown at this time.

Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.


11

Table of Contents

NOTE 2: INVENTORIES

Inventories consist of raw materials, finished goods, and promotional materials. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories as of September 30, 2018 and December 31, 2017, consisted of the following (in thousands):
 
September 30, 2018
 
December 31, 2017
Raw materials
$
798

 
$
879

Finished goods
12,448

 
9,072

Inventory reserves for obsolescence
(535
)
 
(566
)
Total
$
12,711

 
$
9,385



NOTE 3: INCOME TAXES

For the three and nine months ended September 30, 2018, the Company’s effective tax rate was 167.8% and 298.5%, respectively. For the three and nine months ended September 30, 2017, the Company’s effective tax rate was (58.5)% and (11.1)%, respectively. For the three and nine months ended September 30, 2018 and 2017, the Company’s effective tax rate was determined based on the estimated annual effective income tax rate.

The effective tax rates for the three and nine months ended September 30, 2018 were different from the federal statutory rate due to the mix of earnings across jurisdictions, valuation allowance recorded on foreign losses in certain jurisdictions, and the impact of global intangible low-tax income (“GILTI”) as a result of the TCJA.
 
The effective tax rates for the three and nine months ended September 30, 2017 were lower than what would be expected if the U.S. federal statutory rate was applied to income before taxes. Items which decreased the effective income tax rate included favorable rate differences from foreign jurisdictions, unrealized foreign exchange gains, deductions on non-qualified stock options, and the removal of certain tax reserve items due to the expiration of the applicable statute of limitations. This was partially offset by items that increased the effective income tax rate, which included tax paid in connection with a Korean audit settlement and other foreign permanent components.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, Income Tax Accounting Implications of the TCJA (“SAB 118”), which provides guidance on accounting for the impact of the TCJA, in effect allowing an entity to use a methodology similar to the measurement period in a business combination. Pursuant to the disclosure provisions of SAB 118, as of September 30, 2018, the Company has completed its accounting for the tax effects of the TCJA.


NOTE 4: EARNINGS (LOSS) PER SHARE

The Company calculates basic Earnings per Share ("EPS") by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS also reflects the potential dilution that could occur if common stock were issued for awards outstanding under the Mannatech, Incorporated 2017 Stock Incentive Plan.

In determining the potential dilution effect of outstanding stock options during the three and nine months ended September 30, 2018, the Company used the quarterly and nine-month ended average common stock close price of $19.91 and $18.06 per share, respectively. The Company reported a net loss for the three and nine months ended September 30, 2018.

In determining the potential dilution effect of outstanding stock options during the three and nine months ended September 30, 2017, the Company used the quarterly and nine-month ended average common stock close price of $15.39 and $17.02 per share, respectively. For the three and nine months ended September 30, 2017, approximately 0.2 million and 0.5 million shares of the Company's common stock subject to options were excluded from the diluted EPS calculation, respectively, as the effect would have been antidilutive.



12

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5: STOCK-BASED COMPENSATION

The Company currently has one active stock-based compensation plan, the Mannatech, Incorporated 2017 Stock Incentive Plan (the "2017 Plan"), which was adopted by the Company’s Board of Directors on April 17, 2017 and was approved by its shareholders on June 8, 2017. The 2017 Plan supersedes the Mannatech, Incorporated 2008 Stock Incentive Plan, as amended, which was set to expire on February 20, 2018. The Board has reserved a maximum of 250,000 shares of our common stock that may be issued under the 2017 Plan, consisting of 181,674 newly reserved shares and 68,326 shares that remained available for issuance under the 2008 Plan (subject to adjustments for stock splits, stock dividends or other changes in corporate capitalization). As of September 30, 2018, the Company had a total of 39,572 shares available for grant under the 2017 Plan, which expires on April 16, 2027.

The 2008 Plan provided, and the 2017 Plan provides, for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock and performance stock units to our employees, board members, and consultants. However, only employees of the Company and its corporate subsidiaries are eligible to receive incentive stock options. The exercise price per share for all stock options will be no less than the market value of a share of common stock on the date of grant. Any incentive stock option granted to an employee owning more than 10% of our common stock will have an exercise price of no less than 110% of our common stock’s market value on the grant date.

The majority of stock options vest over two or three years, and generally are granted with a term of ten years, or five years in the case of an incentive option granted to an employee who owns more than 10% of our common stock.

The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the nine months ended September 30, 2018 and 2017, the company granted 184,667 and 10,000 stock options, respectively. The fair value of stock options granted during the nine months ended September 30, 2018 and 2017 was approximately $7.29 and $5.87 per share, respectively. The Company recognized compensation expense as follows for the three and nine months ended September 30 (in thousands):


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Total gross compensation expense
$
138

 
$
57

 
$
765

 
$
200

Total tax benefit associated with compensation expense
7

 
9

 
43

 
37

Total net compensation expense
$
131

 
$
48

 
$
722

 
$
163

 
As of September 30, 2018, the Company expects to record compensation expense in the future as follows (in thousands):
 
Three months
ending
December 31,
2018
 
Year ending December 31,
 
 
2019
 
2020
 
2021
Total gross unrecognized compensation expense
$
1

 
$
481

 
$
138

 
$

Tax benefit associated with unrecognized compensation expense

 
19

 
7

 

Total net unrecognized compensation expense
$
1

 
$
462

 
$
131

 
$





13

Table of Contents

NOTE 6: SHAREHOLDERS’ EQUITY

Treasury Stock

On May 18, 2018, the Company commenced a modified Dutch auction cash tender offer to purchase up to $16.0 million of its outstanding common stock, par value $0.0001 per share, at a per share price not greater than $21.00 nor less than $18.50, to each seller in cash, less any applicable withholding taxes and without interest (the "tender offer"). The tender offer expired on June 15, 2018. As a result of the tender offer, the Company accepted for purchase a total of 316,659 shares of its common stock which were properly tendered and not properly withdrawn at the price of $21.00 per share, for an aggregate purchase price of $6.6 million, which was funded from cash on hand.
    
During the three months ended September 30, 2018, the Company purchased 24,868 additional shares of its common stock outstanding.

As of September    30, 2018, the Company had 2,381,244 shares of common stock outstanding.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income, displayed in the Consolidated Statement of Shareholders’ Equity, represents net income plus the results of certain shareholders’ equity changes not reflected in the Consolidated Statements of Operations, such as foreign currency translation and certain pension and post-retirement benefit obligations. The after-tax components of accumulated other comprehensive income, are as follows (in thousands):

 
Foreign
Currency
Translation
 
Pension
Postretirement
Benefit
Obligation
 
Accumulated
Other
Comprehensive
Income, Net
Balance as of December 31, 2017
$
5,703

 
$
281

 
$
5,984

Current-period change (1)
(1,757
)
 

 
(1,757
)
Balance as of September 30, 2018
$
3,946

 
$
281

 
$
4,227

(1)No material amounts reclassified from accumulated other comprehensive income.

Dividends

On March 12, 2018, the Board of Directors declared a dividend of $0.125 per share that was paid on March 28, 2018 to shareholders of record on March 21, 2018, for an aggregate amount of $340 thousand.

On May 10, 2018, the Board of Directors declared a dividend of $0.125 per share that was paid on May 30, 2018 to shareholders of record on May 23, 2018, for an aggregate amount of $340 thousand.

On August 10, 2018, the Board of Directors declared a dividend of $0.50 per share that was paid on September 26, 2018 to shareholders of record on September 17, 2018, for an aggregate amount of $1.2 million.



14

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7: LITIGATION

Administrative Proceeding

Mannatech Korea, Ltd. v. Busan Custom Office, Busan District Court, Korea

On or before April 12, 2015, Mannatech Korea, Ltd. filed a suit against the Busan Custom Office (“BCO”) to challenge BCO’s method of calculation regarding its assessment notice issued on July 11, 2013. The assessment notice included an audit of the Company’s imported goods covering fiscal years 2008 through 2012 and required the Company to pay $1.0 million for this assessment, all of which was paid in January 2014. Both parties submitted a response to the Court’s inquiry on January 15, 2016. The final hearing for the case was held on May 26, 2016 where each party presented their respective arguments. The Court set the decision hearing on October 27, 2016, and the Court decided the case in the Company’s favor. However, on November 18, 2016, BCO filed an appeal to the Busan High Court. The first hearing occurred on March 31, 2017, and the second hearing occurred on April 21, 2017. The final hearing was held on June 2, 2017. The Court issued its decision on June 30, 2017 in favor of the BCO. The Company appealed this decision on August 24, 2017. The Company anticipates a final decision on the appeal by the first quarter of 2019. This matter remains open.


Trademark Opposition - U.S. Patent and Trademark Office

United States Trademark Opposition No. 91221493, Shaklee Corporation v. Mannatech, Incorporated re: UTH

On April 15, 2015, the Company received notice that Shaklee Corporation (“Shaklee”) filed a Notice of Opposition to the Company’s trademark application for UTH (stylized as Ūth) with the USPTO. On May 19, 2015, the Company filed an answer to the opposition and also filed a counterclaim seeking to cancel Shaklee’s registration of its YOUTH mark.

On March 28, 2017, the Trademark Trial and Appeal Board (the "TTAB") ruled on the 56(d) Motion, granting the Company’s motion in part to oblige Shaklee to answer the Company’s request for discovery related to Shaklee’s use or non-use of the YOUTH mark. The Company took the deposition of Shaklee’s designated witness on May 31, 2017. On June 29, 2017, the Company filed Applicant’s Opposition to Opposer’s Motion for Summary Judgment on Applicant’s Counterclaim for Abandonment and Applicant’s Cross Motion for Summary Judgment on its Counterclaim for Abandonment. Shaklee’s reply in support of their Motion for Summary Judgment and Response to the Company’s Counterclaim was filed on August 3, 2017. Each party’s respective motions for summary judgment were denied by the TTAB. The Company filed its expert disclosures on and the parties completed discovery on May 21, 2018. On October 2, 2018, the parties entered into a settlement agreement, under which Shaklee shall withdraw the Opposition and the Company may use the terms UTH, Ūth, Ūth, and ŪTH for non-medicated skincare preparation and cosmetics. A Joint Stipulation of Dismissal was filed on October 3, 2018, and on October 18, 2018, the TTAB granted the joint stipulated motions to dismiss. The Company considers this matter closed.

Litigation in General

The Company has incurred several claims in the normal course of business. The Company believes such claims can be resolved without any material adverse effect on its consolidated financial position, results of operations, or cash flows.

The Company maintains certain liability insurance; however, certain costs of defending lawsuits are not covered by or only partially covered by its insurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or in part. The Company accrues costs to defend itself from litigation as they are incurred or as they become determinable.

The outcome of litigation is uncertain, and despite management’s views of the merits of any litigation, or the reasonableness of the Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for the contingencies arising from current legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated.


15

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8: FAIR VALUE

The Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures.

Fair Value Measurements and Disclosure (Topic 820) of the FASB establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:
Level 1 – Quoted unadjusted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.
Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.
The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. The investment instruments held by the Company are money market funds and interest bearing deposits for which quoted market prices are readily available. The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company does not have any material financial liabilities that were required to be measured at fair value on a recurring basis at September 30, 2018.  The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of September 30, 2018 and December 31, 2017.

September 30, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Money Market Funds – JPMorgan Chase, US
$
852

 
$

 
$

 
$
852

Interest bearing deposits – various banks
7,508

 

 

 
7,508

Total assets
$
8,360

 
$

 
$

 
$
8,360

Amounts included in:
 

 
 

 
 

 
 

Cash and cash equivalents
$
1,564

 
$

 
$

 
$
1,564

Restricted cash
741

 

 

 
741

Long-term restricted cash
6,055

 

 

 
6,055

Total
$
8,360

 
$

 
$

 
$
8,360



December 31, 2017
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Interest bearing deposits – various banks
$
23,695

 
$

 
$

 
$
23,695

Total assets
$
23,695

 
$

 
$

 
$
23,695

Amounts included in:
 

 
 

 
 

 
 

Cash and cash equivalents
$
16,651

 
$

 
$

 
$
16,651

Restricted cash
741

 

 

 
741

Long-term restricted cash
6,303

 

 

 
6,303

Total
$
23,695

 
$

 
$

 
$
23,695



16

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9: SEGMENT INFORMATION

The Company's sole reporting segment is one where we sell proprietary nutritional supplements, skin care and anti-aging products, and weight-management and fitness products through network marketing distribution channels operating in twenty-five countries. Each of the business units sells similar packs (with the exception of the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan where packs have been replaced with associate fees, see Note 1, Organization and Summary of Significant Accounting Policies) and products and possesses similar economic characteristics, such as selling prices and gross margins. In each country, the Company markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financial information by country and focuses its internal reporting and analysis of revenues by pack sales and associate fees and product sales. The Company sells its products through its independent associates who occupy positions in our network and distribute products through similar distribution channels in each country. No single independent associate has ever accounted for more than 10% of the Company’s consolidated net sales. The Company also operates a non-direct selling business in mainland China. Our subsidiary in China, Meitai, is operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China.

The Company operates facilities in fourteen countries and sells product in twenty-six countries around the world. These facilities are located in the United States, Canada, Switzerland, Australia, the United Kingdom, Japan, the Republic of Korea (South Korea), Taiwan, South Africa, Mexico, Hong Kong, Singapore, Colombia and China. Each facility services different geographic areas. We currently sell our products in three regions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong and China).

Consolidated net sales shipped to customers in these regions, along with pack or associate fee and product information for the three and nine months ended September 30, were as follows (in millions, except percentages):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Region
2018
 
2017
 
2018
 
2017
Americas
$
13.3

 
30.9
%
 
$
14.1

 
33.6
%
 
$
44.3

 
34.2
%
 
$
49.1

 
37.7
%
Asia/Pacific
26.6

 
61.9
%
 
24.4

 
58.1
%
 
75.2

 
58.1
%
 
71.0

 
54.5
%
EMEA
3.1

 
7.2
%
 
3.5

 
8.3
%
 
10.0

 
7.7
%
 
10.2

 
7.8
%
Totals
$
43.0

 
100.0
%
 
$
42.0

 
100.0
%
 
$
129.5

 
100.0
%
 
$
130.3

 
100.0
%
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Consolidated product sales
$
42.5

 
$
40.4

 
$
128.1

 
$
117.0

Consolidated pack sales and associate fees(a)
0.6

 
1.8

 
1.7

 
13.5

Consolidated other
(0.1
)
 
(0.2
)
 
(0.3
)
 
(0.2
)
Consolidated total net sales
$
43.0

 
$
42.0

 
$
129.5

 
$
130.3

(a)Coincident with the introduction of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017, the Company collects associate fees, which each independent associate pays to the Company annually in order to be entitled to earn commissions, benefits and incentives for that year. The Company collected associate fees within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan since the implementation of 2017 Associate Compensation Plan. Prior to the change, independent associates purchased packs that were bundles of products within these respective geographic markets. Since implementing the 2017 Associate Compensation Plan, total associate fees represented an immaterial amount of total sales.  



17

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Long-lived assets, which include property and equipment and construction in process for the Company and its subsidiaries, as of September 30, 2018 and December 31, 2017, reside in the following regions, as follows (in millions):
Region
September 30, 2018
 
December 31, 2017
Americas
$
5.6

 
$
2.9

Asia/Pacific
1.2

 
1.3

EMEA
0.1

 
0.1

Total
$
6.9

 
$
4.3


Inventory balances, which consist of raw materials, finished goods, and promotional materials, as offset by the allowance for slow moving or obsolete inventories, reside in the following regions (in millions):
Region
September 30, 2018
 
December 31, 2017
Americas
$
5.0

 
$
3.5

Asia/Pacific
5.8

 
4.5

EMEA
1.9

 
1.4

Total
$
12.7

 
$
9.4



18

Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three and nine months ended September 30, 2018 as compared to the same periods in 2017, and should be read in conjunction with Item 1 “Financial Statements” in Part I of this quarterly report on Form 10-Q. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis.  To supplement our financial results presented in accordance with GAAP, we disclose certain adjusted financial measures which we refer to as Constant dollar (“Constant dollar”) measures, which are non-GAAP financial measures. Refer to the Non-GAAP Financial Measures section herein for a description of how such Constant dollar measures are determined.

COMPANY OVERVIEW

Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).

On July 1, 2017, we revised our 2017 Associate Compensation Plan, which was designed to stimulate business growth and development for our active business building associates and to maximize the buying experience for our preferred customers. In doing so, the Company hopes to better utilize commission dollars to stimulate Company growth.  The 2017 Associate Compensation Plan provides revised income streams, new leadership levels and titles, and modified various volume requirements for our associates. In addition, the 2017 Associate Compensation Plan re-designated members as preferred customers and modified their pricing structure.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 202,000 active associates and preferred customer positions held by individuals that had purchased our products and/or packs or paid associate fees during the last 12 months, who we refer to as current associates and preferred customers. New pack sales and the receipt of new associate fees in connection with new positions in our network are leading indicators for the long-term success of our business. New associate or preferred customer positions are created in our network when our associate fees are paid or packs and products are purchased for the first time under a new account. We operate as a seller of nutritional supplements, topical and skin care and anti-aging products, and weight-management products through our network marketing distribution channels operating in 25 countries and direct e-commerce retail in China. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.

Because we sell our products through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of current associates and preferred customers that occupy sales or purchasing positions in our network; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure. Our subsidiary in China, Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business in China until it acquires a direct selling license in China.

The Company maintains a corporate website at www.mannatech.com.

19

Table of Contents

Current Economic Conditions and Recent Developments

Overall net sales increased $1.0 million, or 2.4%, to $43.0 million, during the three months ended September 30, 2018, as compared to the same period in 2017. Net sales for the nine months ended September 30, 2018 decreased by $0.8 million, or 0.6%, to $129.5 million, as compared to the same period in 2017. For the three months ended September 30, 2018, our net sales increased 2.9% on a Constant dollar basis (see Non-GAAP Measures, below); unfavorable foreign exchange caused a $0.2 million decrease in GAAP net sales as compared to the same period in 2017. For the nine months September 30, 2018, our net sales decreased 2.5% on a Constant dollar basis; favorable foreign exchange caused a $2.5 million increase in GAAP net sales as compared to the same period in 2017. For the three and nine months ended September 30, 2018, our operations outside of the Americas accounted for approximately 69.1% and 65.8%, respectively, of our consolidated net sales.

The net sales comparisons for the three and nine months ended September 30, 2018 and September 30, 2017 were primarily affected by the average value of product orders and the transition to associate fees from pack sales in conjunction with the changes made to our 2017 Associate Compensation Plan.
For the three months ended September 30, 2018, the average product order value increased 6.1%, to $194, as compared to $183 for the same period in 2017. This was partially offset by a 4.7% decrease in the number of product orders, to 224,998 for the three months ended September 30, 2018, as compared to 236,172 during the same period in 2017. For the nine months ended September 30, 2018, the average product order value increased 14.4%, to $199, as compared to $174 for the same period in 2017. This was partially offset by a 5.9% decrease in the number of product orders, to 668,709 for the nine months ended September 30, 2018, as compared to 710,633 during the same period in 2017.
The number of packs sold to, and associate fees paid by, new and continuing independent associates and preferred customers increased 16.8% during the third quarter of 2018 to 28,754, as compared to 24,609 during the same period in 2017. In addition, the average value of packs and associate fees decreased by $53, to $22 for the third quarter of 2018, as compared to $76 for the same period in 2017. The number of packs sold to, and associate fees paid by, new and continuing independent associates and preferred customers decreased 12.6% to 73,271, for the nine months ended September 30, 2018, as compared to 83,859 for the same period in 2017. Additionally, the average value of packs and associate fees decreased by $138, to $24, for the nine months ended September 30, 2018, as compared to $162 for the same period in 2017.

The changes in our 2017 Associate Compensation Plan were strategically designed to reduce the importance of pack sales and maximize the buying experience for our preferred customers, thus affecting the mix between product and pack sales. Additional information regarding the changes to our 2017 Associate Compensation Plan can be found in the Current Economic Conditions and Recent Developments section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's annual report on Form 10-K for the year ended December 31, 2017, filed March 26, 2018.

Excluding the effects due to the translation of foreign currencies into U.S. dollars, net sales would have increased $1.2 million for the three months ended September 30, 2018 compared to the same period in 2017, and decreased $3.3 million for the nine months ended September 30, 2018 compared to the same period in 2017. These adjusted net sales expressed in Constant dollars are a non-GAAP financial measure discussed in further detail below.


20

Table of Contents


RESULTS OF OPERATIONS

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended September 30, 2018 and 2017 (in thousands, except percentages):

 
2018
 
2017
 
Change from
2018 to 2017
 
Total
dollars
 
% of
net sales
 
Total
dollars
 
% of
net sales
 
Dollar
 
Percentage
Net sales
$
43,014

 
100.0
 %
 
$
41,997

 
100.0
%
 
$
1,017

 
2.4
 %
Cost of sales
9,037

 
21.0
 %
 
8,233

 
19.6
%
 
804

 
9.8
 %
Gross profit
33,977

 
79.0
 %
 
33,764

 
80.4
%
 
213

 
0.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Commissions and incentives
18,054

 
42.0
 %
 
18,370

 
43.7
%
 
(316
)
 
(1.7
)%
Selling and administrative expenses
8,111

 
18.9
 %
 
8,171

 
19.5
%
 
(60
)
 
(0.7
)%
Depreciation and amortization expense
475

 
1.1
 %
 
424

 
1.0
%
 
51

 
12.0
 %
Other operating costs
5,667

 
13.2
 %
 
6,115

 
14.6
%
 
(448
)
 
(7.3
)%
Total operating expenses
32,307

 
75.1
 %
 
33,080

 
78.8
%
 
(773
)
 
(2.3
)%
Income from operations
1,670

 
3.9
 %
 
684

 
1.6
%
 
986

 
144.2
 %
Interest income
50

 
0.1
 %
 
10

 
%
 
40

 
400.0
 %
Other income (expense), net
(83
)
 
(0.2
)%
 
177

 
0.4
%
 
(260
)
 
(146.9
)%
Income before income taxes
1,637

 
3.8
 %
 
871

 
2.1
%
 
766

 
87.9
 %
Provision for income taxes
(3,300
)
 
(7.7
)%
 
510

 
1.2
%
 
(3,810
)
 
(747.1
)%
Net income (loss)
$
(1,663
)
 
(3.9
)%
 
$
1,381

 
3.3
%
 
$
(3,044
)
 
(220.4
)%

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2018 and 2017 (in thousands, except percentages):

 
2018
 
2017
 
Change from
2018 to 2017
 
Total
dollars
 
% of
net sales
 
Total
dollars
 
% of
net sales
 
Dollar
 
Percentage
Net sales
$
129,534

 
100.0
 %
 
$
130,324

 
100.0
%
 
$
(790
)
 
(0.6
)%
Cost of sales
25,426

 
19.6
 %
 
25,781

 
19.8
%
 
(355
)
 
(1.4
)%
Gross profit
104,108

 
80.4
 %
 
104,543

 
80.2
%
 
(435
)
 
(0.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 

 
 

Commissions and incentives
54,361

 
42.0
 %
 
54,445

 
41.8
%
 
(84
)
 
(0.2
)%
Selling and administrative expenses
25,706

 
19.8
 %
 
26,803

 
20.6
%
 
(1,097
)
 
(4.1
)%
Depreciation and amortization expense
1,521

 
1.2
 %
 
1,379

 
1.1
%
 
142

 
10.3
 %
Other operating costs
22,086

 
17.1
 %
 
20,447

 
15.7
%
 
1,639

 
8.0
 %
Total operating expenses
103,674

 
80.0
 %
 
103,074

 
79.1
%
 
600

 
0.6
 %
Income from operations
434

 
0.3
 %
 
1,469

 
1.1
%
 
(1,035
)
 
(70.5
)%
Interest income
212

 
0.2
 %
 
58

 
%
 
154

 
265.5
 %
Other income, net
681

 
0.5
 %
 
209

 
0.2
%
 
472

 
225.8
 %
Income before income taxes
1,327

 
1.0
 %
 
1,736

 
1.3
%
 
(409
)
 
(23.6
)%
Provision for income taxes
(3,637
)
 
(2.8
)%
 
193

 
0.1
%
 
(3,830
)
 
(1,984.5
)%
Net income (loss)
$
(2,310
)
 
(1.8
)%
 
$
1,929

 
1.5
%
 
$
(4,239
)
 
(219.8
)%

21

Table of Contents



Non-GAAP Financial Measures

To supplement our financial results presented in accordance with GAAP, we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: Net Sales, Gross Profit, and Income from Operations. We refer to these adjusted financial measures as Constant dollar items, which are non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate, which is the prior year’s rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.
Three-month period ended
(in millions, except percentages)
September 30, 2018
 
September 30, 2017
 
Constant $ Change
 
GAAP
Measure:
Total $
 
Non-GAAP
Measure:
Constant $
 
GAAP
Measure:
Total $
 
Dollar
 
Percent
Net sales
$
43.0

 
$
43.2

 
$
42.0

 
$
1.2

 
2.9
 %
Product
42.5

 
42.7

 
40.4

 
2.3

 
5.7
 %
Pack sales and associate fees(a)
0.6

 
0.6

 
1.8

 
(1.2
)
 
(66.7
)%
Other
(0.1
)
 
(0.1
)
 
(0.2
)
 
0.1

 
(50.0
)%
Gross profit
34.0

 
34.0

 
33.8

 
0.2

 
0.6
 %
Income from operations
1.7

 
1.6

 
0.7

 
0.9

 
128.6
 %

Nine-month period ended
(in millions, except percentages)
September 30, 2018

September 30, 2017

Constant $ Change

GAAP
Measure:
Total $

Non-GAAP
Measure:
Constant $

GAAP
Measure:
Total $

Dollar

Percent
Net sales
$
129.5


$
127.0


$
130.3


$
(3.3
)

(2.5
)%
Product
128.1


125.6


117.0


8.6


7.4
 %
Pack sales and associate fees(a)
1.7


1.7


13.5


(11.8
)

(87.4
)%
Other
(0.3
)

(0.3
)

(0.2
)

(0.1
)

50.0
 %
Gross profit
104.1


102.0


104.5


(2.5
)

(2.4
)%
Income (loss) from operations
0.4


(0.2
)

1.5


(1.7
)

(113.3
)%

(a)Coincident with the introduction of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017, the Company collects associate fees, which each independent associate pays to the Company annually in order to be entitled to earn commissions, benefits and incentives for that year. The Company collected associate fees within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan since the implementation of 2017 Associate Compensation Plan. Prior to the change, independent associates purchased packs that were bundles of products within these respective geographic markets. Since implementing the 2017 Associate Compensation Plan, total associate fees represented an immaterial amount of total sales.

22

Table of Contents

Net Sales

Consolidated net sales for the three months ended September 30, 2018 increased by $1.0 million, or 2.4%, to $43.0 million as compared to $42.0 million for the same period in 2017. Consolidated net sales for the nine months ended September 30, 2018 decreased by $0.8 million, or 0.6%, to $129.5 million, as compared to $130.3 million for the same period in 2017.

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

Consolidated net sales by region for the three months ended September 30, 2018 and 2017 were as follows (in millions, except percentages):
Region
Three Months Ended
September 30, 2018
 
Three Months Ended
September 30, 2017
Americas
$
13.3

 
30.9
%
 
$
14.1

 
33.6
%
Asia/Pacific
26.6

 
61.9
%
 
24.4

 
58.1
%
EMEA
3.1

 
7.2
%
 
3.5

 
8.3
%
Total
$
43.0

 
100.0
%
 
$
42.0

 
100.0
%
Consolidated net sales by region for the nine months ended September 30, 2018 and 2017 were as follows (in millions, except percentages):
Region
Nine Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2017
Americas
$
44.3

 
34.2
%
 
$
49.1

 
37.7
%
Asia/Pacific
75.2

 
58.1
%
 
71.0

 
54.5
%
EMEA
10.0

 
7.7
%
 
10.2

 
7.8
%
Total
$
129.5

 
100.0
%
 
$
130.3

 
100.0
%


For the three months ended September 30, 2018, net sales in the Americas decreased by $0.8 million, or 5.7%, to $13.3 million, as compared to $14.1 million for the same period in 2017. This decrease was primarily due to a 4.4% decline in revenue per active independent associate and preferred customer as well as a 1.4% decrease in the number of active independent associates and preferred customers.

For the nine months ended September 30, 2018, net sales in the Americas decreased by $4.8 million, or 9.8%, to $44.3 million, as compared to $49.1 million for the same period in 2017. This decrease was primarily due to an 8.5% decline in revenue per active independent associate and preferred customer and a decrease in the number of active independent associates and preferred customers of less than 1%.

For the three months ended September 30, 2018, our operations outside of the Americas accounted for approximately 69.1% of our consolidated net sales, whereas in the same period in 2017, our operations outside of the Americas accounted for approximately 66.4% of our consolidated net sales.

For the nine months ended September 30, 2018, our operations outside of the Americas accounted for approximately 65.8% of our consolidated net sales, whereas in the same period in 2017, our operations outside of the Americas accounted for approximately 62.3% of our consolidated net sales.

For the three months ended September 30, 2018, Asia/Pacific net sales increased by $2.2 million, or 9.0%, to $26.6 million, as compared to $24.4 million for the same period in 2017. This increase was primarily due to a 34.2% increase in revenue per active independent associate and preferred customer and partially offset by an 18.8% decline in the number of active independent associates and preferred customers. During the three months ended September 30, 2018, the loyalty program increased sales by $0.6 million, as compared to the same period in 2017. Foreign currency exchange had no significant impact on revenue during the quarter.

For the nine months ended September 30, 2018, Asia/Pacific net sales increased by $4.2 million, or 5.9%, to $75.2 million, as compared to $71.0 million for the same period in 2017. This increase was primarily due to a 30.4% increase in revenue per active independent associate and preferred customer, which was partially offset by a 16.0% decline in the number of active

23

Table of Contents

independent associates and preferred customers. During the nine months ended September 30, 2018, the loyalty program increased sales by $1.1 million, as compared to the same period in 2017. Foreign currency exchange had the effect of increasing revenue by $2.2 million for the nine months ended September 30, 2018, as compared to the same period in 2017. The currency impact is primarily due to the fluctuation of the Korean Won and Japanese Yen.

For the three months ended September 30, 2018, EMEA net sales decreased by $0.4 million, or 11.4%, to $3.1 million, as compared to $3.5 million for the same period in 2017. This decrease was primarily due to a 20.6% decline in revenue per active independent associate and preferred customer, which was partially offset by an 11.5% increase in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of decreasing revenue by $0.2 million for the three months ended September 30, 2018, as compared to the same period in 2017.  The currency impact is primarily due to the fluctuation of the South African Rand.

For the nine months ended September 30, 2018, EMEA net sales decreased by $0.2 million, or 2.0%, to $10.0 million, as compared to $10.2 million for the same period in 2017. This decrease was primarily due to a 12.1% decline in revenue per active independent associate and preferred customer partially offset by a 17.9% increase in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by $0.3 million when the nine-month period ending September 30, 2018 is compared to the same period in 2017.  The currency impact is primarily due to the fluctuation of the South Africa Rand.

Our total sales and sales mix could be influenced by any of the following:

changes in our sales prices;
changes in shipping fees;
changes in consumer demand;
changes in the number of independent associates and preferred customers;
changes in competitors’ products;
changes in economic conditions;
changes in regulations;
announcements of new scientific studies and breakthroughs;
introduction of new products;
discontinuation of existing products;
adverse publicity;
changes in our commissions and incentives programs;
direct competition; and
fluctuations in foreign currency exchange rates.

    

24

Table of Contents

Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages):
 
Three Months Ended
September 30,
 
Change
 
2018
 
2017
 
Dollar
 
Percentage
Consolidated product sales
$
42.5

 
$
40.4

 
$
2.1

 
5.2
 %
Consolidated pack sales and associate fees(a)
0.6

 
1.8

 
(1.2
)
 
(66.7
)%
Consolidated other
(0.1
)
 
(0.2
)
 
0.1

 
(50.0
)%
Total consolidated net sales
$
43.0

 
$
42.0

 
$
1.0

 
2.4
 %

 
Nine Months Ended
September 30,
 
Change
 
2018
 
2017
 
Dollar
 
Percentage
Consolidated product sales
$
128.1

 
$
117.0

 
$
11.1

 
9.5
 %
Consolidated pack sales and associate fees(a)
1.7

 
13.5

 
(11.8
)
 
(87.4
)%
Consolidated other
(0.3
)
 
(0.2
)
 
(0.1
)
 
50.0
 %
Total consolidated net sales
$
129.5

 
$
130.3

 
$
(0.8
)
 
(0.6
)%

(a)Coincident with the introduction of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017, the Company collects associate fees, which each independent associate pays to the Company annually in order to be entitled to earn commissions, benefits and incentives for that year. The Company collected associate fees within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan since the implementation of 2017 Associate Compensation Plan. Prior to the change, independent associates purchased packs that were bundles of products within these respective geographic markets. Since implementing the 2017 Associate Compensation Plan, total associate fees represented an immaterial amount of total sales.

Product Sales

Our product sales are made to our independent associates and preferred customers at published wholesale prices. We also sell our products to preferred customers in various markets at discounted published retail prices.

Product sales for the three months ended September 30, 2018 increased by $2.1 million, or 5.2%, as compared to the same period in 2017. The increase in product sales was primarily due to an increase in the average order value. The average order value for the three months ended September 30, 2018 was $194, as compared to $183 for the same period in 2017. The number of orders processed during the three months ended September 30, 2018 decreased by 4.7%, as compared to the same period in 2017.

Product sales for the nine months ended September 30, 2018 increased by $11.1 million, or 9.5%, as compared to the same period in 2017. The increase in product sales was primarily due to an increase in the average order value. The average order value for the nine months ended September 30, 2018 was $199, as compared to $174 for the same period in 2017. The number of orders processed during the nine months ended September 30, 2018 decreased by 5.9%, as compared to the same period in 2017.

Pack Sales and Associate Fees

As a result of the 2017 Associate Compensation Plan, which was implemented on July 1, 2017, the Company now collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year. The Company collected associate fees in lieu of pack sales within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan since the implementation of the 2017 Associate Compensation Plan. Prior to the change, pack sales represented sales of packs that were bundles of products within these respective geographic markets. Since implementing the 2017 Associate Compensation Plan, total associate fees for these respective geographic markets represented an immaterial amount of total sales. In order to stay current and competitive with industry changes, the 2017 Associate Compensation Plan was strategically designed to reduce the importance of pack sales. As such, over the course of the coming year, we will seek to replace pack sales with associate fees in all of our geographic markets.

25

Table of Contents


In markets other than the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan, packs may still be purchased by our associates who wish to build a Mannatech business. We also do not collect associate fees or sell packs in our non-direct selling business in mainland China. These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. In certain of these markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and eligibility for additional commissions and incentives.

The dollar amount of pack sales and associate fees related to new and continuing independent associates held by individuals in our network was as follows, for the three and nine months ended September 30, (in millions, except percentages):
 
Three Months Ended
September 30,
 
Change
 
2018
 
2017
 
Dollar
 
Percentage
New
$
0.1

 
$
1.4

 
$
(1.3
)
 
(92.9
)%
Continuing
0.5

 
0.4

 
0.1

 
25.0
 %
Total
$
0.6

 
$
1.8

 
$
(1.2
)
 
(66.7
)%

 
Nine Months Ended
September 30,
 
Change
 
2018
 
2017
 
Dollar
 
Percentage
New
$
0.5

 
$
6.1

 
$
(5.6
)
 
(91.8
)%
Continuing
1.2

 
7.4

 
(6.2
)
 
(83.8
)%
Total
$
1.7

 
$
13.5

 
$
(11.8
)
 
(87.4
)%


Total pack sales and associate fees for the three months ended September 30, 2018 decreased by $1.2 million, or 66.7%, to $0.6 million, as compared to $1.8 million for the same period in 2017. Average pack and associate fee value for the three months ended September 30, 2018 was $22, as compared to $76 for the same period in 2017. The total number of packs and associate fees sold increased by 4,145, or 16.8%, to 28,754 for the three months ended September 30, 2018, as compared to the same period in 2017.

Total pack sales and associate fees for the nine months ended September 30, 2018 decreased by $11.8 million, or 87.4%, to $1.7 million, as compared to $13.5 million for the same period in 2017. Average pack and associate fee value for the nine months ended September 30, 2018 was $24, as compared to $162 for the same period in 2017. The total number of packs and associate fees sold decreased by 10,588, or 12.6%, to 73,271 for the nine months ended September 30, 2018, as compared to the same period in 2017.

Pack sales and associate fees correlate to new associate positions held by individuals in our network when a starter pack or associate fee is purchased and to continuing associate positions held by individuals in our network when an upgrade or a renewal pack or renewal associate fee is purchased. However, there is no direct correlation between product sales and the number of new and continuing associate positions and preferred customer positions held by individuals in our network because associates and preferred customers utilize products at different volumes.


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During 2017 and continuing into 2018, we took the following actions to recruit and retain associates and preferred customers:
registered our most popular products with the appropriate regulatory agencies in all countries of operations;
rolled out new products;
launched an aggressive marketing and educational campaign;
continued to strengthen compliance initiatives;
concentrated on publishing results of research studies and clinical trials related to our products;
initiated additional incentives;
explored new advertising and educational tools to broaden name recognition; and
implemented changes to our global associate career and compensation plan.

The approximate number of new and continuing active independent associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended September 30, 2018 and 2017 were as follows:

 
2018
 
2017
New
86,000

 
42.6
%
 
101,000

 
46.1
%
Continuing
116,000

 
57.4
%
 
118,000

 
53.9
%
Total
202,000

 
100.0
%
 
219,000

 
100.0
%

Recruitment of new independent associates and preferred customers increased 1.6% in the third quarter of 2018, as compared to the third quarter of 2017. The number of new independent associate and preferred customer positions held by individuals in our network for the third quarter of 2018 was approximately 25,802, as compared to 25,394 for the same period in 2017.

Other Sales

Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications; (iii) training and event registration fees; and (iv) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools support our independent associates, which in turn helps stimulate product sales.

For the three months ended September 30, 2018, other sales increased by $0.1 million, or 50.0%, as compared to the same period in 2017. The increase was primarily due to a decrease in event revenue and an increase in sales refunds, partially offset by an increase in revenue earned from Success Tracker™.

For the nine months ended September 30, 2018, other sales decreased by $0.1 million, as compared to the same period in 2017. The decrease was primarily due to a decrease in event revenue and an increase in sales refunds, partially offset by an increase in revenue earned from Success Tracker™ and promotional materials.

Gross Profit

For the three months ended September 30, 2018, gross profit increased by $0.2 million, or 0.6%, to $34.0 million, as compared to $33.8 million for the same period in 2017. For the three months ended September 30, 2018, gross profit as a percentage of net sales decreased to 79.0%, as compared to 80.4% for the same period in 2017. During the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, the gross profit percentage decreased due to increases in freight out costs and variance and write-offs.

For the nine months ended September 30, 2018, gross profit decreased by $0.4 million, or 0.4%, to $104.1 million, as compared to $104.5 million for the same period in 2017. For the nine months ended September 30, 2018, gross profit as a percentage of net sales increased to 80.4%, as compared to 80.2% for the same period in 2017. During the nine months ended September 30, 2018, the gross profit percentage improved due to the mix between product and pack sales. During the nine months ended September 30, 2017, we incurred other non-recurring charges.


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Commissions and Incentives

Commission expenses for the three months ended September 30, 2018 decreased by 4.5%, or $0.8 million, to $16.8 million, as compared to $17.6 million for the same period in 2017. For the three months ended September 30, 2018, commissions as a percentage of net sales decreased to 39.1% from 42.0% for the same period in 2017.

Commission expenses for the nine months ended September 30, 2018 decreased by 1.9%, or $1.0 million, to $51.5 million, as compared to $52.5 million for the same period in 2017. For the nine months ended September 30, 2018, commissions as a percentage of net sales decreased to 39.7% from 40.3% for the same period in 2017.

The aforementioned period-over-period changes related to commission expenses were a result of adopting the 2017 Compensation Plan on July 1, 2017.

Incentive costs for the three months ended September 30, 2018 increased by 64.2%, or $0.5 million, to $1.2 million, as compared to $0.7 million for the same period in 2017 due to new incentives in growth markets. For the three months ended September 30, 2018, incentives as a percentage of net sales increased to 2.8% from 1.8% for the same period in 2017.

Incentive costs for the nine months ended September 30, 2018 increased by 46.9%, or $0.9 million, to $2.9 million, as compared to $2.0 million for the same period in 2017 due to new incentives in growth markets. For the nine months ended September 30, 2018, incentives as a percentage of net sales increased to 2.2% from 1.5% for the same period in 2017.

Selling and Administrative Expenses

Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses, such as the costs related to hosting our corporate-sponsored events.

For the three months ended September 30, 2018, selling and administrative expenses decreased by $0.1 million, or 0.7%, to $8.1 million, as compared to $8.2 million for the same period in 2017. The decrease in selling and administrative expenses consisted of a $0.2 million decrease in payroll costs in our headquarters, Japan, Australia, and Europe offices, and a $0.1 million decrease in distribution and warehouse costs, offset by $0.1 million increase in stock-based compensation expense and a $0.1 million increase in contract labor costs. Selling and administrative expenses, as a percentage of net sales, for the three months ended September 30, 2018 decreased to 18.9% from 19.5% for the same period in 2017.

For the nine months ended September 30, 2018, selling and administrative expenses decreased by $1.1 million, or 4.1%, to $25.7 million, as compared to $26.8 million for the same period in 2017. The decrease in selling and administrative expenses consisted of a $1.7 million decrease in payroll costs in our headquarters, Japan, Australia, and Europe offices, offset by $0.6 million increase in stock-based compensation expense. Selling and administrative expenses, as a percentage of net sales, for the nine months ended September 30, 2018 decreased to 19.8% from 20.6% for the same period in 2017.

Other Operating Costs

Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses. Changes in other operating costs are associated with the changes in our net sales.

For the three months ended September 30, 2018, other operating costs decreased by $0.4 million, or 7.3%, to $5.7 million, as compared to $6.1 million for the same period in 2017. For the three months ended September 30, 2018, other operating costs as a percentage of net sales decreased to 13.2% from 14.6% for the same period in 2017. The decrease in operating costs was primarily due to a $0.8 million decrease in travel and entertainment costs and a $0.1 million decrease in other miscellaneous operating expenses. This was partially offset by a $0.4 million increase in legal and consulting fees and a $0.1 million increase in office expenses.

For the nine months ended September 30, 2018, other operating costs increased by $1.6 million, or 8.0%, to $22.1 million, as compared to $20.4 million for the same period in 2017. For the nine months ended September 30, 2018, other operating costs as a percentage of net sales increased to 17.1% from 15.7% for the same period in 2017. The increase in operating costs was primarily due to a $1.6 million increase in office expenses (which includes $1.3 million of non-recurring office expenses incurred with the corporate office move), a $0.2 million increase in legal and consulting fees, and a $0.2 million increase in other operating

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expenses. These were partially offset by a $0.2 million decrease in travel and entertainment and a $0.1 million decrease in auto and equipment leases.

Depreciation and Amortization Expense

Depreciation and amortization expense was $0.5 million for each of the three months ended September 30, 2018 and 2017

Depreciation and amortization expense was $1.5 million and $1.4 million, for the nine months ended September 30, 2018 and 2017, respectively.

Other Income (Expense), Net

Due to foreign exchange gains and losses, other expense was $83 thousand for the three months ended September 30, 2018 and other income was $177 thousand for the three months ended September 30, 2017.

Due to foreign exchange gains, other income was $681 thousand for the nine months ended September 30, 2018 and $209 thousand for the nine months ended September 30, 2017.

Income Tax Benefit (Provision)

Provision (benefit) for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the three and nine months ended September 30:

Country
2018
 
2017
Australia
30.0
%
 
30.0
%
Canada
26.5
%
 
26.5
%
China
25.0
%
 
25.0
%
Colombia
33.0
%
 
34.0
%
Cyprus
12.5
%
 
12.5
%
Denmark
22.0
%
 
22.0
%
Gibraltar
10.0
%
 
10.0
%
Hong Kong
16.5
%
 
16.5
%
Japan
34.8
%
 
34.8
%
Mexico
30.0
%
 
30.0
%
Norway
23.0
%
 
24.0
%
Republic of Korea
25.0
%
 
22.0
%
Russia(1)
20.0
%
 
20.0
%
Singapore
17.0
%
 
17.0
%
South Africa
28.0
%
 
28.0
%
Sweden
22.0
%
 
22.0
%
Switzerland
16.2
%
 
16.2
%
Taiwan
20.0
%
 
17.0
%
Ukraine(2)
18.0
%
 
18.0
%
United Kingdom
19.0
%
 
20.0
%
United States
24.0
%
 
37.5
%
(1)On Aug 1, 2016, the Company established a legal entity in Russia called Mannatech RUS Ltd., but currently does not operate in Russia.
(2)On Mar 21, 2014, the Company suspended operations in Ukraine, but maintains the legal entity, Mannatech Ukraine LLC.
Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States.

We use the recognition and measurement provisions of the FASB ASC Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not”

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criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction.

The provision for income taxes is directly related to our profitability and changes in the taxable income among countries of operation. For the three and nine months ended September 30, 2018, the Company’s effective tax rate was 167.8% and 298.5%, respectively, as compared to (58.5)% and (11.1)%, respectively, for the same periods in 2017. The effective tax rates for the three months and nine months ended September 30, 2018 were different from the federal statutory rate due to the mix of earnings across jurisdictions, valuation allowances recorded on foreign losses in certain jurisdictions, and the impact of global intangible low-tax income ("GILTI") as a result of the TCJA passed last year.

The effective tax rates for the three months and nine months ended September 30, 2017 were lower than what would be expected if the U.S. federal statutory rate applied to income before taxes. Items which decreased the effective income tax rate included favorable rate differences from foreign jurisdictions, unrealized foreign exchange gains, deductions on non-qualified stock options, and the removal of certain tax reserve items due to the expiration of applicable statute of limitations. This was partially offset by items that increased the effective income tax rate, which included tax paid related to a Korean audit settlement and other foreign permanent components.


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LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

As of September 30, 2018, our cash and cash equivalents decreased by 31.9%, or $12.0 million, to $25.7 million from $37.7 million as of December 31, 2017. The Company is required to restrict cash for direct selling insurance premiums and credit card sales in the Republic of Korea. The current portion of restricted cash balances were $1.5 million at each of September 30, 2018 and December 31, 2017. Finally, fluctuations in currency rates produced a decrease of $1.7 million and an increase of $1.4 million in cash and cash equivalents for the nine months ended September 30, 2018 and 2017, respectively.

Our principal use of cash is to pay for operating expenses, including commissio