MANNATECH INC - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  September 30, 2016

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)

Registrant’s Telephone Number, including Area Code:  (972) 471-7400

 

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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  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of October 31, 2016, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share, was 2,686,868.

 

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MANNATECH, INCORPORATED

TABLE OF CONTENTS

 

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:

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management’s plans and objectives for future operations;

 

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existing cash flows being adequate to fund future operational needs;

 

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future plans related to budgets, future capital requirements, market share growth, and anticipated capital projects and obligations;

 

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the realization of net deferred tax assets;

 

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the ability to curtail operating expenditures;

 

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global statutory tax rates remaining unchanged;

 

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the impact of future market changes due to exposure to foreign currency translations;

 

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the possibility of certain policies, procedures, and internal processes minimizing exposure to market risk;

 

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the impact of new accounting pronouncements on financial condition, results of operations, or cash flows;

 

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the outcome of new or existing litigation matters;

 

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the outcome of new or existing regulatory inquiries or investigations; and

 

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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, 2015, 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:

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overall growth or lack of growth in the nutritional supplements industry;

 

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plans for expected future product development;

 

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changes in manufacturing costs;

 

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shifts in the mix of packs and products;

 

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the future impact of any changes to global associate career and compensation plans or incentives or the regulations thereto;

 

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the ability to attract and retain independent associates and members;

 

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new regulatory changes that may affect operations, products or compensation plans or incentives;

 

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the competitive nature of our business with respect to products and pricing;

 

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publicity related to our products or network-marketing; and

 

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the political, social, and economic climate.

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,” “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,” “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”.

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

See accompanying notes to unaudited consolidated financial statements.

 

MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED)

(in thousands, except per share information)

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME– (UNAUDITED)

(in thousands)

 

See accompanying notes to unaudited consolidated financial statements.

 

MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

– (UNAUDITED)

(in thousands)

See accompanying notes to unaudited consolidated financial statements.

 

MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

(in thousands)

See accompanying 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 Coppell, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “MTEX”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products. 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 and Hong Kong).

Independent associates (“associates”) purchase the Company’s products at published wholesale prices to either sell to retail customers or for personal use. Members purchase the Company’s products at a discount from published retail prices primarily for personal use.  The Company cannot distinguish products sold for personal use from other sales 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 accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America (“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, 2015 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, 2015 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 15, 2016 (the “2015 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 2015 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 generally accepted accounting principles 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.

Cash and Cash Equivalents

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 of submission to the credit card processor. As of September 30, 2016 and December 31, 2015, credit card receivables were $1.9 million and $0.4 million, respectively. As of September 30, 2016 and December 31, 2015, cash and cash equivalents held in bank accounts in foreign countries totaled $33.8 million and $31.3 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.

 

Restricted Cash

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, 2016 and December 31, 2015, our total restricted cash was $8.6 million and $8.1 million, respectively.

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, 2016 and December 31, 2015, receivables consisted primarily of amounts due from members and associates. 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. At September 30, 2016 and December 31, 2015, the Company held an allowance for doubtful accounts of $0.5 million and $0.3 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 market. The Company periodically reviews inventories for obsolescence, and any inventories identified as obsolete are reserved or written off.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Expenditures for maintenance and repairs are charged to expense as incurred. The cost of property and equipment sold or otherwise retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in other operating costs in the accompanying Consolidated Statements of Operations. The estimated useful lives of fixed assets are as follows:

		Estimated useful life
Office furniture and equipment		5 to 7 years
Computer hardware and software		3 to 5 years
Automobiles		3 to 5 years
Leasehold improvements(1)		2 to 10 years

(1)

The Company amortizes leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term.

Property and equipment are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes a comparison of future projected cash flows generated by the asset or group of assets with its associated net carrying value. If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value.

On August 29, 2016, we received information indicating that a portion of the capitalized costs related to an item included in our computer hardware and software asset group would not be completed due to problems with the vendor in completing the code. We evaluated the project and determined a charge was required due to the abandonment of the project. For the quarter and year ending September 30, 2016 we recorded $0.4 million in operating expenses that represented work that was performed, but which no longer has any value to the Company or any possibility of affecting future cash inflows.

 

Other Assets

As of September 30, 2016 and December 31, 2015, other assets were $4.5 million and $3.8 million, respectively, and primarily consisted of deposits for building leases in various locations of $2.5 million and $1.9 million, respectively. Additionally, included in the September 30, 2016 and December 31, 2015 balances was $1.7 million and $1.6 million, respectively, 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 each of the September 30, 2016 and December 31, 2015 balances was $0.2 million of indefinite lived intangible assets relating to the Manapol® powder trademark.

Notes Payable

Notes payable were $1.5 million and $1.8 million as of September 30, 2016 and December 31, 2015, respectively, as a result of funding from a capital financing agreement related to our investment in computer hardware and software and other financing arrangements. At September 30, 2016, the current portion was $0.8 million and the long-term portion was $0.7 million.  At December 31, 2015, the current portion was $0.7 million and the long-term portion was $1.1 million.

Other Long-Term Liabilities

Other long-term liabilities were $1.6 million and $2.0 million as of September 30, 2016 and December 31, 2015, respectively.  At September 30, 2016 and December 31, 2015, the Company recorded $0.2 million and $0.7 million, respectively, in other long-term liabilities related to uncertain income tax positions (see Note 8, Income Taxes of the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed March 15, 2016). 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.  At September 30, 2016 and December 31, 2015, accrued restoration costs related to these leases amounted to $0.5 million and $0.4 million, respectively.  At each of September 30, 2016 and December 31, 2015, 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 $0.5 million (see Note 10, Employee Benefit Plans, of the Company’s 10-K, filed March 15, 2016).

Revenue Recognition and Deferred Commissions

The Company’s revenue is derived from sales of individual products, sales of its starter and renewal packs, and shipping fees. Substantially all of the Company’s product and pack sales are made to associates at published wholesale prices and to members at discounted published retail prices. 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 packs and products upon receipt by the customer. Corporate-sponsored event revenue is recognized when the event is held. The Company defers certain components of its revenue. At September 30, 2016 and December 31, 2015, the Company’s deferred revenue was $9.6 million and $8.7 million, respectively. When participating in the Company’s loyalty program, customers earn loyalty points from qualified automatic orders that can be applied to future purchases. The Company defers the dollar equivalent in revenue of these points until the points are applied, forfeited, or expired, which includes an estimate of the percentage of the unvested loyalty points that are expected to be forfeited or expired. The deferred revenue associated with the loyalty program at September 30, 2016 and December 31, 2015, was $8.0 million and $8.1 million, respectively. Deferred revenue consisted primarily of: (i) sales of packs and products shipped but not received by the customers by the end of the respective period; (ii) revenue from the loyalty program; and (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event. In total current assets, the Company defers commissions on (i) the sales of packs and products shipped but not received by the customers by the end of the respective period and (ii) the loyalty program. Deferred commissions were $3.7 million and $3.4 million at September 30, 2016 and December 31, 2015, respectively.

 

The Company estimates a sales return reserve for expected sales refunds based on historical experience over a rolling six-month period. If actual results differ from our estimated sales return reserve due to various factors, the amount of revenue recorded each period could be materially affected. 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, 2016 our sales return reserve consisted of the following (in thousands):

Shipping and Handling Costs

The Company records freight and shipping fees collected from its customers as revenue. The Company records inbound freight as a component of inventory and cost of sales.

Commissions and Incentives

Associates earn commissions and incentives based on their direct and indirect commissionable net sales over 13 business periods each year. Each business period equals 28 days. The Company accrues commissions and incentives when earned by associates and pays commissions on product sales three weeks following the business period end and pays commissions on its pack sales five weeks following the business period end.

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, and Mexico operations, and changes in the pension obligation for its Japanese employees.

 

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 at September 30, 2016 and December 31, 2015, consisted of the following (in thousands):

NOTE 3: INCOME TAXES

For the three and nine months ended September 30, 2016, the Company’s effective tax rate was (77.7)% and (19.8)%, respectively. Taxes for the nine months ended September 30, 2016 were a $0.1 million benefit on a $0.5 million pre-tax book income mainly due to fluctuation of income between quarters resulting in a refund and valuation allowances released in Switzerland. For the three and nine months ended September 30, 2015, the Company’s effective income tax rate was 175.5% and 24.5%, respectively.  For the three and nine months ended September 30, 2016 and 2015, the Company’s effective tax rate was determined based on the estimated annual effective tax rate.

The effective tax rates for the three and nine months ended September 30, 2016 were lower than what would have been expected if the U.S. federal statutory rate were applied to income before taxes. Items decreasing the effective income tax rate include the favorable rate differences from foreign jurisdictions, fluctuation of income between quarters resulting in a refund, further valuation allowance release from Switzerland and certain tax reserve items that were removed due to the expiration of the applicable statute of limitations. Items discrete to the third quarter include foreign exchange losses and increased losses in jurisdictions for which no taxable benefit can be recorded.

The effective tax rates for the three months ended September 30, 2015 were higher than what would have been expected if the federal statutory rate were applied to income before taxes. Items increasing the effective tax rate include a return to provision adjustment offset by favorable rate differences from foreign jurisdictions and the utilization of foreign income tax credit. The effective tax rates for the nine months ended September 30, 2015 were lower than what would have been expected if the federal statutory rate were applied to income before taxes. Items decreasing the effective income tax rate include the favorable rate differences from foreign jurisdictions due to the overall profitability and the utilization of foreign income tax credit.

NOTE 4: EARNINGS PER SHARE

The Company calculates basic Earnings Per Share (“EPS”) by dividing net income 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 2008 Stock Incentive Plan. In determining the potential dilution effect of outstanding stock options during the three months ended September 30, 2016 and 2015, the Company used the quarter’s average common stock closing price of $18.02 and $18.13 per share, respectively. In determining the potential dilution effect of outstanding stock options during the nine months ended September 30, 2016 and 2015, the Company used the nine-month average common stock closing price of $19.12 and $19.83 per share, respectively. For the three- and nine-months ended September 30, 2016, approximately 0.1 million shares of the Company’s stock subject to options were excluded from the diluted EPS calculation as their effect would have been antidilutive.

 

NOTE 5: STOCK-BASED COMPENSATION

The Company currently has one active stock-based compensation plan, which was approved by shareholders. The Company grants stock options to employees, consultants, and board members at the fair market value of its common stock, on the date of grant, with a term no greater than ten years. The majority of stock options vest over two or three years. Shareholders who own 10% or more of the Company’s outstanding stock are granted incentive stock options at an exercise price that may not be less than 110% of the fair market value of the Company’s common stock on the date of grant and have a term no greater than five years.

In February 2008, the Company’s Board of Directors approved the Mannatech, Incorporated 2008 Stock Incentive Plan, as amended (the “2008 Plan”), which reserved up to 100,000 (as adjusted for a 1-for-10 reverse stock split) shares of common stock for issuance of stock options and restricted stock to our employees, board members, and consultants, plus any shares reserved under the Company’s then-existing, unexpired stock plans for which options had not yet been issued, and any shares underlying outstanding options under the then-existing stock option plans that terminate without having been exercised in full. The 2008 Plan was approved by the Company’s shareholders at the 2008 Annual Shareholders’ Meeting and was amended at the 2012 Annual Shareholders’ Meeting to increase the number of shares of common stock subject to the plan by 100,000 and amended again at the 2014 Annual Shareholders’ Meeting to increase the number of shares of common stock subject to the plan by an additional 130,000. As of September 30, 2016, the 2008 Plan had 85,397 stock options available for grant before the plan expires on February 20, 2018.

The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the three months ended September 30, 2016 and 2015, the Company granted zero and 12,000 stock options, respectively. The fair value of stock options granted during the three months ended September 30, 2015 was approximately $10.36 per share.  During the nine months ended September 30, 2016 and 2015, the Company granted 10,000 and 32,000 stock options, respectively. The fair value of stock options granted during the nine months ended September 30, 2016 was approximately $12.18 per share. The Company recognized compensation expense as follows for the three and nine months ended September 30 (in thousands):

 

As of September 30, 2016, the Company expects to record compensation expense in the future as follows (in thousands):

 

NOTE 6: SHAREHOLDERS’ EQUITY

On June 30, 2004, the Company’s Board of Directors authorized the Company to repurchase, in the open market, the lesser of (i) 131,756 shares of its common stock and (ii) $1.3 million of its shares, (the “June 2004 Plan”).  On August 28, 2006, a second program permitting the Company to purchase, in the open market, up to $20 million of its outstanding shares was approved by the Board of Directors (the “August 2006 Plan”).  On July 14, 2011, the Company’s Board of Directors authorized the Company to reactivate the June 2004 Plan.  On August 31, 2016, the Company’s Board of Directors reactivated the August 2006 Plan and authorized the Company to repurchase up to $0.5 million of the Company’s outstanding common shares in open market transactions.  As of November 8, 2016, the maximum number of shares available for repurchase under the June 2004 Plan was 19,084, and the total number of shares purchased in the open market under the June 2004 Plan was 112,672.  As of November 8, 2016, there was $19.8 million remaining for repurchase under the August 2006 Plan, and the total value of shares repurchased in the open market under the August 2006 plan was $0.2 million. The Company does not have any stock repurchase plans or programs other than the June 2004 Plan and the August 2006 Plan.

During the three and nine months ended September 30, 2016, the company repurchased 9,009 shares at an average price of $17.54.

Accumulated other comprehensive income, displayed in the Consolidated Statements of Shareholders’ Equity and Comprehensive Income, 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):

1

No amounts reclassified from accumulated other comprehensive income.

On August 11, 2016, the Board of Directors declared a dividend of $0.125 per share that was paid on September 21, 2016 to shareholders of record on August 31, 2016.

 

NOTE 7: LITIGATION

Mannatech, Incorporated v. Wellness Quest, LLC and Harley Reginald McDaniel, Case No. 3:14-cv-2497, U.S. District Court, for the Northern District of Texas, Dallas Division

On July 11, 2014 the Company filed a patent infringement lawsuit against Wellness Quest, LLC and Dr. H. Reginald McDaniel (“Defendants”) alleging the Defendants infringe United States Patent Nos. 7,157,431 and 7,202,220, both entitled “Compositions of Plant Carbohydrates as Dietary Supplements” (the “Patents”) and seeking to stop the Defendants’ manufacture, offer, and sale of infringing glyconutritional dietary supplement products. On July 16, 2014, the Company filed a Motion for Preliminary Injunction preventing Defendants from infringing the Patents pending a final decision on the merits. On August 29, 2014, the Defendants filed their Response to Plaintiff’s Motion for Preliminary Injunction and Brief in Support along with their Answer and Affirmative Defenses. On November 4, 2014, the Court denied the Company’s Motion for Preliminary Injunction and Motion to Expedite Discovery.  On December 15, 2014, the Company deposed Dr. Reginald McDaniel. Each party has submitted its list of claim constructions/definitions and a list of the supporting authority.  Each party has filed its opening brief and its respective responsive brief. Defendants designated an expert and the Company deposed the expert on January 27, 2015 regarding his claim construction opinions while reserving the right to examine him later regarding other matters.  Mediation on this matter was held on April 24, 2015. A settlement was not reached.

On May 12, 2015 the Company received notice of an Order of Transfer advising that the case had been reassigned from Judge Ed Kinkeade to Judge David C. Godbey for all further proceedings. On July 20, 2015, the Court issued its Markman ruling adopting the Company’s proposed claim construction for all disputed terms except for “dietary supplement composition” which it found needed no construction. On August 20, 2015, Defendants filed a request for an interlocutory appeal, and the Company filed a reply on October 6, 2015. The Company also filed a separate motion requesting entry of a final judgment and permanent injunction on September 8, 2015.

On November 5, 2015 the Court issued an Order accepting Defendants’ stipulation of infringement under the Court’s claim interpretation and granted the Company’s partial motion for summary judgment and issued a permanent injunction against Defendants’ infringement of the Patents. The Court stayed the permanent injunction until the conclusion of Defendants’ appeal to the U.S. Court of Appeals for the Federal Circuit (the “Court of Appeals”). On December 3, 2015, Defendants filed their Notice of Appeal which was docketed by the Court of Appeals on December 8, 2015. Defendants-Appellants filed their brief with the Court of Appeals on February 28, 2016. The Company-Appellee filed its brief with the Court of Appeals on March 24, 2016. Oral argument for the appeal was held on August 1, 2016.  Each side was given fifteen minutes for argument before the Appellate Court.  On August 5, 2016, the Court of Appeals issued a per curium opinion affirming the trial court’s judgment in favor of the Company. On August 10, 2016, the Company filed a motion to lift the stay of permanent injunction previously issued by the trial court. On August 24, 2016, the Company received confirmation from its counsel that Defendants changed the formulation of the infringing product to a formulation proposed by the Company. Defendants filed their response to the Company’s motion on August 31, 2016. The parties conferred via telephone and electronic mail on August 31, 2016 and September 1, 2016 regarding the Company’s motion and Defendants’ response.  On September 1, 2016 the Company filed an Amended Certificate of Conference with the Court advising that the Company’s motion was now unopposed. The Court has yet to rule on this motion. This matter remains open.

This lawsuit continues the Company’s enforcement of its patent rights, and the Company intends to vigorously prosecute this matter.  Based on the previous successful patent infringement lawsuits against Country Life, LLC, Glycobiotics International, Inc., Techmedica Health, Inc., IonX Holdings, Inc., Boston Mountain Laboratories, Inc., Green Life, LLC, Xiong Lo, and RBC Life Sciences, Inc., the Company believes there is a strong likelihood that it will obtain permanent injunctions against the manufacture and sale of any infringing products for the duration of the Company’s patents.

 

Diana Anselmo and New Day Today Corporation v. Mannatech, Incorporated, Case No. DC-15-01904, Judicial District Court, Dallas County, Texas

On February 18, 2015 Ms. Diana Anselmo and New Day Today Corporation (collectively, the “Plaintiffs”) filed suit against Mannatech alleging breach of contract pertaining to a portion of proceeds from a Mannatech Associate position once held by Ms. Anselmo’s former husband, Ray Gebauer. Plaintiffs are seeking damages in excess of $1,000,000 and a declaration that the Company continue to pay Plaintiffs proceeds from Mr. Gebauer’s former account.

The Company filed its answer on March 23, 2015 denying the Plaintiffs’ allegations. The Court set the case for trial on March 7, 2016; however, on December 7, 2015 the Court granted the parties Agreed Motion for Continuation and reset the trial for September 26, 2016. At a hearing on August 19, 2016, the Court granted a continuance and reset the trial for November 14, 2016, and on October 18, 2016, the Court reset the trial for December 5, 2016.

The Court issued a mediation order on April 20, 2015.  The Company filed a Motion for Summary Judgment on June 15, 2016. The Mediation was conducted on June 17, 2016. The parties entered into a Mediation Settlement Agreement (“MSA”) that was contingent upon Plaintiff Anselmo reaching an acceptable compromise and settlement with the Internal Revenue Service (“IRS”) on or before July 18, 2016. On July 11, 2016, the Company was notified that Plaintiff Anselmo did not reach an acceptable compromise with the IRS, thus making the MSA null and void.

Plaintiffs filed their response to the Company’s Motion for Summary Judgment on August 5, 2016. The hearing on that motion was held on August 11, 2016 and due to time constraints was continued on August 19, 2016. On August 31, 2016 the Court entered an Order Denying the Company’s Motion for Summary Judgment. Discovery formally closed on October 7, 2016. At a hearing on October 10, 2016, the Company argued that it should be allowed further discovery related to the assertions by Plaintiff Anselmo that she was not legally married to Mr. Gebauer both before and after the Company and Plaintiff Anselmo entered into the contract at issue.  The Court ordered Plaintiffs to produce communications with the IRS regarding Plaintiff Anselmo’s relationship to Mr. Gebauer.   It is not possible at this time to predict whether the Company will incur any liability, or to estimate the ranges of damages, if any, which may be incurred in connection with this matter. However, the Company believes it has a valid defense and will vigorously defend this claim. This matter remains open. 

Uniscience Solution v. Chang, et al.; Chang, et al. v. Uniscience Solution, Randy Lee, and Mannatech, Inc. (cross-defendant), Case No. 16K03995 (Superior Court of California, Los Angeles Co.)

On June 1, 2016 the Company received notice that on May 20, 2016 Vivian Hsiaoling Chang and Alan Jyh Woei Hsu (collectively, the “Cross-plaintiffs”) filed an unverified cross-complaint against the Company and Uniscience Solution, and Randy Lee alleging breach of contract seeking $22,300 plus unspecified special and punitive damages in addition to attorneys’ fees and related costs. Cross-plaintiffs, Uniscience Solution, and Randy Lee are independent distributors of the Company who entered into an agreement, separate and apart from their respective distributor agreements with the Company. The Cross-plaintiffs assert that Mannatech is a party to such other agreement; which it is not. The Company filed an answer denying the assertions in the unverified cross-complaint. On September 23, 2016, the Cross-plaintiffs and Uniscience Solution entered into a settlement agreement. On September 27, 2016, the Cross-plaintiffs filed a Request for Dismissal with the Court dismissing all claims against the Company with prejudice. On October 26, 2016, the Company received notice from its counsel that the Court entered the Dismissal on October 3, 2016. This matter is closed.

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

On April 15, 2015 the Company received notice that Shaklee Corporation filed a Notice of Opposition to the Company’s trademark application for UTH (stylized as Ū^th) 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. Shaklee filed an extension to oppose the UTH mark on June 18, 2015, and the request to extend time to oppose was granted until July 18, 2015. Shaklee filed a second extension on July 17, 2015, and the request to extend time to oppose has been granted until September 16, 2015. Shaklee filed motions to strike the Company’s Affirmative Defenses to the Opposition and Counterclaim to cancel their registrations.  The Company filed responses and the Trademark Trial and Appeal Board (“TTAB”) ruled in Shaklee’s favor. The Company filed an amended Answer to the Opposition and Amended Counterclaim on November 18, 2015. Shaklee then filed an answer to the Company’s Counterclaim on December 30, 2015.

 

On September 15, 2015 Shaklee filed two more Notices of Opposition for the UTH & Design and ŪTH applications. The Company filed Answers and Counterclaims on November 20, 2015. On January 25, 2016, the Company filed a motion to strike Shaklee’s affirmative defense on cancellation. On May 17, 2016, the TTAB granted the Company’s motion to strike Shaklee’s affirmative defense on cancellation. On August 9, 2016, Shaklee filed a Motion for Summary Judgment on the Company’s cancellation filing of its YOUTH mark. On September 9, 2016, the Company filed a Motion for Request for Discovery to Respond to Summary Judgment under Rule 56(d). On September 28, 2016, Shaklee filed a response to the Company’s motion to cancel the request for discovery. The Company plans to file a response in support of the motion under Rule 56(d) on October 18, 2016. The proceedings, including discovery, have been suspended until the TTAB can rule on the motions. This matter remains open.

It is not possible at this time to predict the outcome of the USPTO action or whether the Company will incur any liability, or to estimate the ranges of damages, if any, which may be incurred in connection with this matter.  However, the Company believes it has a valid defense and will vigorously defend this claim.

 

Mannatech v. Samuel L. Caster and Wonder Enterprises, LLC, Demand for Arbitration, Case No. 01-15-0003-6812.

 

On May 29, 2015 the Company initiated arbitration proceedings against Samuel L. Caster and Wonder Enterprises, LLC (“Respondents”) alleging breach of contract by Mr. Caster and his company, Wonder Enterprises, under a series of consulting agreements entered into by the parties. Mannatech seeks to recover actual damages, costs of court and prejudgment interest together with disgorgement of all benefits received by the Respondents. The Company estimates its damages to be between $500,000 and $3,500,000. On June 12, 2015 Respondents contacted the Company’s counsel to request mediation. The parties agreed to mediate this dispute, and mediation was held on August 17, 2015. However, a settlement was not reached. A preliminary hearing for arbitration was held on September 18, 2015, and a final hearing commenced on April 25, 2016. A hearing was held on March 2, 2016 where the arbitrator granted Respondents’ request to file a motion for summary judgment and granted the Company until March 21, 2016 to issue its response. The arbitrator also granted the Company’s motion to compel the Respondents to produce the customer list for Mr. Caster’s former company, EM Squared. The Company filed its response to Respondents’ Motion for Summary Judgment on March 21, 2016. The arbitration hearing was scheduled to begin on August 29, 2016; however, the parties reached a settlement agreement and on August 25, 2016 the arbitrator entered the Agreed Order of Dismissal, dismissing all claims with prejudice.  This matter is closed.

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, 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 judge originally set the decision hearing for June 30, 2016; however, after several postponements on the decision hearing to July 14, 2016 and then to August 18, 2016, the decision date of the case was set to October 27, 2016. On October 27, 2016, the Court decided the case in the Company’s favor. However, the BCO may file an appeal within 14 days from the day the BCO receives the decision letter, which the Court released on November 3, 2016. This matter remains open.

There are other ongoing audits in various international jurisdictions that the Company does not expect will have a material effect on our financial statements.

 

The Company maintains certain liability insurance; however, certain costs of defending lawsuits are not covered or are 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.

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 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, 2016.  The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of September 30, 2016 and December 31, 2015.

 

NOTE 9: SEGMENT INFORMATION

The Company conducts its business as a single operating segment, consolidating all of its business units into a single reportable entity, as a seller of proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management and fitness products through its network marketing distribution channels operating in twenty-five countries. Each of the Company’s business units sells similar packs 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 packs 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 operates facilities in thirteen countries and sells product in twenty-five 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, Hong Kong, Singapore, Colombia and Mexico. 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 and Hong Kong).

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

 

 

Long-lived assets, which include property and equipment and construction in process for the Company and its subsidiaries, as of September 30, 2016 and December 31, 2015, reside in the following regions, as follows (in millions):

Inventory balances, which consist of raw materials, work in process, finished goods, and promotional materials, as offset by the allowance for slow moving or obsolete inventories, reside in the following regions (in millions):

NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update “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 defers the effective date by one year to December 15, 2017 for fiscal years, and interim periods within those fiscal years, beginning after that date. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. 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. The Company is evaluating this updated standard to determine if adoption will have a material impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify the accounting for stock based compensation.  The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The update is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted, provided that, if an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period, and all amendments are adopted in the same period. Certain detailed transition provisions apply if an entity elects to early adopt.  The Company is currently evaluating the impact of this standard on the Company’s consolidated results of operations and financial condition.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update provides guidance on eight specific cash flow issues. The update is effective for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. None of the specific issues in the update materially impact the Company’s consolidated statement of cash flows.

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.

 

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, 2016 as compared to the same periods in 2015, and should be read in conjunction with Item I “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 generally accepted accounting principles in the United States ("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

Since November 1993, we have continued to develop innovative, high quality, proprietary nutritional supplements, topical, skin care and anti-aging products, and weight-management products that are sold through a global network marketing system. We operate in three geographic 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 and Hong Kong). By the fourth quarter of 2016, we anticipate commencing a non-direct selling business segment in China.

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 active independent associates and members who 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.

Current Economic Conditions and Recent Developments

Overall net sales increased $4.2 million, to $48.1 million, during the three months ended September 30, 2016, as compared to the same period in 2015.  Net sales increased $2.7 million, or 2.0% during the nine months ended September 30, 2016, as compared to the same period in 2015. For the three and nine months ended September 30, 2016, our operations outside of the Americas accounted for approximately 60.5% and 60.8%, respectively, of our consolidated net sales.

The net sales comparisons for the three- and nine-month periods were affected by the loyalty program and the launch of new products and promotions in markets in the Americas and Asia/Pacific during the third quarter of 2016. Sales from new products and promotions increased third quarter 2016 net sales by $4.1 million and increased net sales for the nine month ended September 30, 2016 by $7.4 million, as compared to the same periods in 2015. The loyalty program increased third quarter 2016 net sales by $0.5 million and decreased net sales for the nine months ended September 30, 2016 by $1.7 million, as compared to the same periods in 2015.

Excluding the effects due to the translation of foreign currencies into U.S. dollars, net sales would have increased $3.0 million and $4.9 million for the three and nine months ended September 30, 2016, respectively. These adjusted net sales expressed in Constant dollars are a non-GAAP financial measure discussed in further detail below.

 

RESULTS OF OPERATIONS

Three Months Ended September 30, 2016 compared to Three Months Ended September 30, 2015

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended September 30, 2016 and 2015 (in thousands, except percentages):

Nine Months Ended September 30, 2016 compared to Nine Months Ended September 30, 2015

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2016 and 2015 (in thousands, except percentages):

 

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.

Net Sales

Consolidated net sales for the three months ended September 30, 2016 increased by $4.2 million, or 9.8%, to $48.1 million, as compared to $43.9 million for the same period in 2015.  Consolidated net sales for the nine months ended September 30, 2016 increased by $2.7 million, or 2.0%, to $137.7 million, as compared to $135.0 million for the same period in 2015.

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

Consolidated net sales by region for the three months ended September 30, 2016 and 2015 were as follows (in millions, except percentages):

 

Consolidated net sales by region for the nine months ended September 30, 2016 and 2015 were as follows (in millions, except percentages):

For the three months ended September 30, 2016, net sales in the Americas increased by $1.2 million, or 6.7%, to $19.0 million, as compared to $17.8 million for the same period in 2015. This increase was primarily due to a 14.9% increase in revenue per active independent associate and member offset by a 7.1% decline in the number of active independent associates and members. During the three months ended September 30, 2016, new products and promotions increased sales by $1.0 million and the loyalty program increased sales by $0.1 million, as compared to the same period in 2015.

For the nine months ended September 30, 2016, net sales in the Americas decreased by $0.7 million, or 1.3%, to $54.0 million, as compared to $54.7 million for the same period in 2015.  This decrease was primarily due to a 13.0% decline in the number of active independent associates and members partially offset by a 6.2% increase in revenue per active independent associate and member. Further, during the nine months ended September 30, 2016, the loyalty program decreased sales by $1.0 million, as compared to the same period in 2015.

For the three months ended September 30, 2016, our operations outside of the Americas accounted for approximately 60.5% of our consolidated net sales, whereas in the same period in 2015, our operations outside of the Americas accounted for approximately 59.4% of our consolidated net sales.

For the nine months ended September 30, 2016, our operations outside of the Americas accounted for approximately 60.8% of our consolidated net sales, whereas in the same period in 2015, our operations outside of the Americas accounted for approximately 59.5% of our consolidated net sales.

For the three months ended September 30, 2016, Asia/Pacific net sales increased by $3.5 million, or 15.9%, to $25.5 million, as compared to $22.0 million for the same period in 2015. During the three months ended September 30, 2016, new products and promotions in Asia/Pacific increased sales by $2.9 million and the loyalty program increased sales by $0.4 million, as compared to the same period in 2015. Foreign currency exchange had the effect of increasing revenue by $1.6 million for the three months ended September 30, 2016, as compared to the same period in 2015. The currency impact is primarily due to the strengthening of the Korean Won, Australian Dollar, New Zealand Dollar, Singapore Dollar, Taiwanese Dollar, and Japanese Yen partially offset by the weakening of the Hong Kong Dollar. Revenue per active independent associate and member increased by 11.4% during the three months ended September 30, 2016, as compared to the same period in 2015.

For the nine months ended September 30, 2016, Asia/Pacific net sales increased by $4.9 million, or 7.2%, to $73.2 million, as compared to $68.3 million for the same period in 2015.  New products and promotions increased sales in Asia/Pacific by $4.8 million, partially offset by the loyalty program, which decreased sales for the nine months ended September 30, 2016 by $0.4 million, as compared to the same period in 2015.  Foreign currency exchange had the effect of decreasing revenue by $0.5 million for the nine months ended September 30, 2016, as compared to the same period in 2015.  The currency impact is primarily due to the weakening of the Korean Won, Australian Dollar, New Zealand Dollar, Taiwanese Dollar, Hong Kong Dollar, and Singapore Dollar partially offset by the strengthening of the Japanese Yen. Revenue per active independent associate and member increased by 3.0% during the nine months ended September 30, 2016, as compared to the same period in 2015.

 

		Three Months Ended September 30								Change
		2016				2015				Dollar				Percentage
Consolidated product sales		$	39.8			$	35.3			$	4.5				12.7	%
Consolidated pack sales			6.9				7.1				(0.2	)			(2.8	)%
Consolidated other, including freight			1.4				1.5				(0.1	)			(6.7	)%
Total consolidated net sales		$	48.1			$	43.9			$	4.2				9.6	%

		Nine Months Ended September 30								Change
		2016				2015				Dollar				Percentage
Consolidated product sales		$	113.6			$	105.8			$	7.8				7.4	%
Consolidated pack sales			20.2				24.9				(4.7	)			(18.9	)%
Consolidated other, including freight			3.9				4.3				(0.4	)			(9.3	)%
Total consolidated net sales		$	137.7			$	135.0			$	2.7				2.0	%

		Three Months Ended September 30								Change
		2016				2015				Dollar				Percentage
New		$	3.6			$	2.4			$	1.2				50.0	%
Continuing			3.3				4.7				(1.4	)			(29.8	)%
Total		$	6.9			$	7.1			$	(0.2	)			(2.8	)%

		Nine Months Ended September 30								Change
		2016				2015				Dollar				Percentage
New		$	8.9			$	6.7			$	2.2				32.8	%
Continuing			11.3				18.2				(6.9	)			(37.9	)%
Total		$	20.2			$	24.9			$	(4.7	)			(18.9	)%

		2016								2015
New			99,000				44.8	%			97,000				43.9	%
Continuing			122,000				55.2	%			124,000				56.1	%
Total			221,000				100.0	%			221,000				100.0	%

Country		2016				2015
Australia			30.0	%			30.0	%
Canada			26.5	%			26.5	%
Cyprus			12.5	%			12.5	%
Colombia(1)			25.0	%			—	%
Denmark			22.0	%			23.5	%
Gibraltar			10.0	%			10.0	%
Hong Kong			16.5	%			16.5	%
Japan			35.4	%			35.4	%
Mexico			30.0	%			30.0	%
Norway			25.0	%			27.0	%
Republic of Korea			22.0	%			22.0	%
Singapore			17.0	%			17.0	%
South Africa			28.0	%			28.0	%
Sweden			22.0	%			22.0	%
Switzerland			16.2	%			16.2	%
Taiwan			17.0	%			17.0	%
United Kingdom			20.0	%			20.0	%
United States			37.5	%			37.5	%

Country		September 30, 2016				December 31, 2015
Mexico		$	2.3			$	2.5
Sweden			0.1				0.1
Switzerland			0.1				1.0
Taiwan			1.2				1.2
Ukraine			0.1				0.1
United States			4.1				4.0
Other Jurisdictions			0.1				0.1
Total		$	8.0			$	9.0

Provided by/(Used in):		2016				2015
Operating activities		$	7.2			$	7.8
Investing activities		$	(1.7	)		$	(1.6	)
Financing activities		$	(1.6	)		$	(0.1	)

Commitments and obligations		Remaining 2016				2017				2018				2019				2020				Thereafter				Total
Capital lease obligations		$	121			$	371			$	206			$	52			$	12			$	—			$	762
Operating leases			1,131				2,431				1,715				865				128				—				6,270
Employment agreements			690				230				—				—				—				—				920
Royalty agreement			15				59				59				59				59				6				257
Tax liability (3)			—				562				—				—				—				154				716
Notes payable and other financing arrangements			283				708				579				—				—				—				1,570
Other obligations(4)			351				196				58				58				116				874				1,653
Total commitments and obligations(1)(2)		$	2,591			$	4,557			$	2,617			$	1,034			$	315			$	1,034			$	12,148

		Estimated useful life		Net carrying value at September 30, 2016
Office furniture and equipment		5 to 7 years		$	0.4 million
Computer hardware and software		3 to 5 years			2.2 million
Automobiles		3 to 5 years			— million
Leasehold improvements		2 to 10 years(1)			1.1 million
Total net carrying value at September 30, 2016				$	3.7 million

Loyalty program		(in thousands)
Loyalty deferred revenue as of January 1, 2015		$	9,703
Loyalty points forfeited or expired			(8,801	)
Loyalty points used			(15,077	)
Loyalty points vested			20,403
Loyalty points unvested			1,845
Loyalty deferred revenue as of December 31, 2015		$	8,073

Loyalty deferred revenue as of January 1, 2016		$	8,073
Loyalty points forfeited or expired			(5,334	)
Loyalty points used			(11,879	)
Loyalty points vested			15,556
Loyalty points unvested			1,559
Loyalty deferred revenue as of  September 30, 2016		$	7,975

		June 2016 Grant
Estimated fair value per share of options granted:		$	12.18
Assumptions:
Annualized dividend yield			—	%
Risk-free rate of return			1.1	%
Common stock price volatility			73.5	%
Expected average life of stock options (in years)			4.5

		Nine months ended September 30, 2016												As of September 30, 2016
Country (foreign currency name)		Low				High				Average				Spot
Australia (Australian Dollar)			0.68691				0.78026				0.74201				0.76743
Canada (Canadian Dollar)			0.68483				0.79791				0.75723				0.76383
Colombia (Peso)			0.00029				0.00036				0.00033				0.00035
Czech Republic (Koruna)			0.03980				0.04271				0.04130				0.04155
Denmark (Kroner)			0.14414				0.15513				0.14988				0.15059
Hong Kong (Hong Kong Dollar)			0.12785				0.12903				0.12881				0.12896
Japan (Yen)			0.00825				0.00999				0.00923				0.00987
Mexico (Peso)			0.05044				0.05824				0.05478				0.05156
New Zealand (New Zealand Dollar)			0.63880				0.74437				0.69259				0.72778
Norway (Krone)			0.11191				0.12447				0.11909				0.12442
Republic of Korea (Won)			0.00081				0.00092				0.00086				0.00091
Singapore (Singapore Dollar)			0.69341				0.74766				0.72966				0.73417
South Africa (Rand)			0.05949				0.07523				0.06706				0.07282
Sweden (Krona)			0.11550				0.12544				0.11920				0.11676
Switzerland (Franc)			0.97787				1.05040				1.02078				1.03153
Taiwan (New Taiwan Dollar)			0.02968				0.03218				0.03090				0.03188
United Kingdom (British Pound)			1.29057				1.48192				1.39404				1.30081
Various countries (1) (Euro)			1.07517				1.15428				1.11616				1.12231

Period		Total number of shares purchased				Average price paid per share				Dollar value of shares that may yet  be purchased (a) (in thousands)
July 2016			—			$	—			$	20,000
August 2016			1,756			$	16.92				19,970
September 2016			7,253			$	17.69				19,841
Total			9,009

	MANNATECH, INCORPORATED
Dated: November 8, 2016	By:	/s/ Alfredo Bala
		Alfredo Bala
		Chief Executive Officer
		(principal executive officer)

Dated: November 8, 2016	By:	/s/ David A. Johnson
		David A. Johnson
		Chief Financial Officer
		(principal financial officer)

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit (s)	Filing Date
3.1	Amended and Restated Articles of Incorporation of Mannatech, dated May 19, 1998.	S-1	333-63133	3.1	October 28, 1998
3.2	Certificate of Amendment to the Amended and Restated Articles of Incorporation of Mannatech, dated January 13, 2012.	8-K	000-24657	3.1	January 17, 2012
3.3	Fifth Amended and Restated Bylaws of Mannatech, dated August 25, 2014.	8-K	000-24657	3.1	August 27, 2014
4.1	Specimen Certificate representing Mannatech’s common stock, par value $0.0001 per share.	S-1	333-63133	4.1	October 28, 1998
31.1*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Mannatech.	*	*	*	*
31.2*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of Mannatech.	*	*	*	*
32.1*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Mannatech.	*	*	*	*
32.2*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of Mannatech.	*	*	*	*
101.INS*	XBRL Instance Document	*	*	*	*
101.SCH*	XBRL Taxonomy Extension Schema Document	*	*	*	*
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document	*	*	*	*
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document	*	*	*	*
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document	*	*	*	*
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document	*	*	*	*