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Mannatech 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

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, 2014

OR
o 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.)
     
600 S. Royal Lane, Suite 200, Coppell, Texas
 
75019
(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 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 x No o

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.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x

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, 2014, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share, was 2,668,244.
 


MANNATECH, INCORPORATED
TABLE OF CONTENTS

1
Part I – FINANCIAL INFORMATION
 
2
2
3
3
4
5
6
   
15
15
16
27
29
33
   
34
   
35
   
Part II – OTHER INFORMATION
 
36
   
36
   
36
   
36
   
36
   
36
   
36
   
37

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, 2013, 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;
 
§ the ability to attract and retain independent associates and members;
 
§ new regulatory changes that may affect operations or products;
 
§ 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.

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 amounts)
 
   
September 30,
2014
   
December 31,
2013
 
ASSETS
 
(unaudited)
     
Cash and cash equivalents
 
$
32,185
   
$
20,395
 
Restricted cash
   
1,514
     
1,519
 
Accounts receivable, net of allowance of $288 and $142 in 2014 and 2013, respectively
   
234
     
423
 
Income tax receivable
   
24
     
4
 
Inventories, net
   
12,467
     
13,988
 
Prepaid expenses and other current assets
   
3,915
     
3,061
 
Deferred commissions
   
5,094
     
2,706
 
Deferred tax assets, net
   
1,807
     
1,578
 
Total current assets
   
57,240
     
43,674
 
Property and equipment, net
   
4,057
     
3,239
 
Long-term restricted cash
   
7,386
     
4,254
 
Other assets
   
3,726
     
3,591
 
Long-term deferred tax assets, net
   
3,230
     
1,303
 
Total assets
 
$
75,639
   
$
56,061
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current portion of capital leases
 
$
902
   
$
704
 
Accounts payable
   
4,800
     
4,794
 
Customer deposits
   
60
     
202
 
Accrued expenses
   
7,568
     
5,796
 
Commissions and incentives payable
   
9,896
     
10,210
 
Taxes payable
   
7,304
     
1,858
 
Current deferred tax liability
   
116
     
114
 
Deferred revenue
   
12,780
     
6,380
 
Total current liabilities
   
43,426
     
30,058
 
Capital leases, excluding current portion
   
970
     
450
 
Other long-term liabilities
   
2,184
     
2,101
 
Total liabilities
   
46,580
     
32,609
 
                 
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, 2,773,972 shares issued and 2,668,244 shares outstanding as of September 30, 2014 and 2,773,972 shares issued and 2,653,913 shares outstanding as of December 31, 2013
   
     
 
Additional paid-in capital
   
41,344
     
42,592
 
Retained earnings (accumulated deficit)
   
898
     
(3,746
)
Accumulated other comprehensive loss
   
(288
)
   
(743
)
Less treasury stock, at cost, 105,728 and 120,059 shares as of September 30, 2014 and December 31, 2013, respectively
   
(12,895
)
   
(14,651
)
Total shareholders’ equity
   
29,059
     
23,452
 
Total liabilities and shareholders’ equity
 
$
75,639
   
$
56,061
 

See accompanying notes to unaudited consolidated financial statements.
 
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,
 
   
2014
   
2013
   
2014
   
2013
 
Net sales
 
$
55,635
   
$
44,432
   
$
144,900
   
$
130,899
 
Cost of sales
   
10,304
     
9,225
     
29,440
     
25,616
 
Gross profit
   
45,331
     
35,207
     
115,460
     
105,283
 
                                 
Operating expenses:
                               
Commissions and incentives
   
20,977
     
19,640
     
57,727
     
56,362
 
Selling and administrative
   
9,567
     
8,497
     
26,389
     
25,669
 
Depreciation and amortization
   
441
     
474
     
1,248
     
1,699
 
Other operating costs
   
6,149
     
6,167
     
19,920
     
18,919
 
Total operating expenses
   
37,134
     
34,778
     
105,284
     
102,649
 
                                 
Income from operations
   
8,197
     
429
     
10,176
     
2,634
 
Interest income
   
25
     
25
     
61
     
29
 
Other expense, net
   
(1,167
)
   
(275
)
   
(1,311
)
   
(1,278
)
Income before income taxes
   
7,055
     
179
     
8,926
     
1,385
 
                                 
Provision for income taxes
   
(1,947
)
   
(980
)
   
(4,282
)
   
(758
)
Net income (loss)
 
$
5,108
   
$
(801
)
 
$
4,644
   
$
627
 
                                 
Earnings (loss) per share:
                               
Basic
 
$
1.92
   
$
(0.30
)
 
$
1.75
   
$
0.24
 
Diluted
 
$
1.89
   
$
(0.30
)
 
$
1.71
   
$
0.23
 
                                 
Weighted-average common shares outstanding:
                               
Basic
   
2,667
     
2,650
     
2,661
     
2,649
 
Diluted
   
2,701
     
2,650
     
2,701
     
2,717
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – (UNAUDITED)
(in thousands)
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Net income (loss)
 
$
5,108
     
(801
)
   
4,644
     
627
 
Foreign currency translations
   
(173
)
   
829
     
455
     
31
 
Comprehensive income
 
$
4,935
     
28
     
5,099
     
658
 

See accompanying notes to unaudited consolidated financial statements.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)

   
Common stock
par value
   
Additional
paid in
capital
   
Retained earnings (accumulated
deficit)
   
Accumulated
other
comprehensive
loss
   
Treasury
stock
   
Total
shareholders’
equity
 
Balance at December 31, 2013
 
$
   
$
42,592
   
$
(3,746
)
 
$
(743
)
 
$
(14,651
)
 
$
23,452
 
Net income
   
     
     
4,644
     
     
     
4,644
 
Charge related to stock-based compensation
   
     
398
     
     
     
     
398
 
Stock option exercises
   
     
(1,646
)
   
     
     
1,756
     
110
 
Foreign currency translations
   
     
     
     
455
     
     
455
 
Balance at September 30, 2014
 
$
   
$
41,344
     
898
     
(288
)
   
(12,895
)
   
29,059
 
 
See accompanying notes to unaudited consolidated financial statements.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)
(in thousands)

   
Nine months ended
September 30,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net income
 
$
4,644
   
$
627
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
1,248
     
1,699
 
Provision for inventory losses
   
1,630
     
318
 
Provision for doubtful accounts
   
266
     
222
 
(Gain) loss on disposal of assets
   
42
     
(1
)
Accounting charge related to stock-based compensation expense
   
397
     
137
 
Deferred income taxes
   
(2,148
)
   
(203
)
Changes in operating assets and liabilities:
               
Accounts receivable
   
(78
)
   
(313
)
Income tax receivable
   
(22
)
   
702
 
Inventories
   
(148
)
   
151
 
Prepaid expenses and other current assets
   
950
     
(410
)
Other assets
   
(187
)
   
183
 
Deferred commissions
   
(2,388
)
   
(1,678
)
Accounts payable
   
(131
)
   
2,645
 
Customer deposits
   
       
Accrued expenses and other liabilities
   
1,885
     
947
 
Taxes payable
   
5,449
     
(1,933
)
Commissions and incentives payable
   
(271
)
   
1,364
 
Deferred revenue
   
6,488
     
3,758
 
Change in restricted cash
   
(3,131
)
   
(1,238
)
Net cash provided by operating activities
   
14,495
     
6,977
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisition of property and equipment
   
(2,173
)
   
(524
)
Proceeds from sale of assets
   
8
     
1
 
Net cash used in investing activities
   
(2,165
)
   
(523
)
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from stock options exercised
   
112
     
22
 
Repayment of capital lease obligations
   
(1,102
)
   
(1,157
)
Net cash used in financing activities
   
(990
)
   
(1,135
)
Effect of currency exchange rate changes on cash and cash equivalents
   
450
     
(255
)
Net increase in cash and cash equivalents
   
11,790
     
5,064
 
Cash and cash equivalents at the beginning of the period
   
20,395
     
14,377
 
Cash and cash equivalents at the end of  the period
 
$
32,185
   
$
19,441
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Income taxes paid, net
 
$
(2,180
)
 
$
(2,187
)
Interest paid on capital leases
 
$
(88
)
 
$
(108
)
Summary of non-cash investing and financing activities:
               
Note receivable, net, relating to sale of property and equipment
  $
   
$
195
 
Assets acquired through financing
  $
1,821
   
$
685
 
 
See accompanying notes to unaudited consolidated financial statements.
 
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 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 into three regions: (i) North America (the United States, Canada and Mexico); (ii) Europe/Middle East/Africa, or “EMEA” (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan and Hong Kong). On March 21, 2014, the Company announced temporary suspension of operations in Ukraine due to political turmoil and ongoing instability in the country.

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, 2013 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, 2013 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 18, 2014 (the “2013 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 2013 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.

Reclassifications

Certain reclassifications have been made to the financial statements for prior periods to conform to the current period presentation.

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.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 each of September 30, 2014 and December 31, 2013, credit card receivables were $3.1 million and $0.6 million, respectively. As of each of September 30, 2014 and December 31, 2013, cash and cash equivalents held in bank accounts in foreign countries totaled $25.4 million and $14.7 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, 2014 and December 31, 2013, our total restricted cash was $8.9 million and $5.8 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 September 30, 2014 and December 31, 2013, 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. As of each of September 30, 2014 and December 31, 2013, the Company held an allowance for doubtful accounts of $0.3 million and $0.1 million, respectively.

Inventories

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

Other Assets

As of September 30, 2014 and December 31, 2013, other assets were $3.7 million and $3.6 million, respectively, and primarily consisted of deposits for building leases in various locations of $1.6 million and $1.4 million, respectively.   Additionally, included in the September 30, 2014 and December 31, 2013 balances was $1.8 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, 2014 and December 31, 2013 balances was $0.2 million of indefinite lived intangible assets relating to the Manapol ® powder trademark.

Other Long-Term Liabilities

Other long-term liabilities were $2.2 million and $2.1 million as of September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, the Company recorded $0.7 million in other long-term liabilities related to uncertain income tax positions (see Note 8, Income Taxes of the Company’s 10-K, filed March 18, 2014). 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. Accrued restoration costs related to these leases amounted to $0.4 million and $0.2 million at September 30, 2014 and December 31, 2013, respectively. 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 $0.6 million at each of September 30, 2014 and December 31, 2013 (See Note 10, Employee Benefit Plans, of the Company’s 10-K, filed March 18, 2014).
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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. 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. At September 30, 2014 and December 31, 2013, the Company’s deferred revenue was $12.8 million and $6.4 million, respectively. During the third quarter of 2013, the Company started a loyalty program through which customers earn loyalty points from qualified automatic orders, which can be applied to future purchases. The Company defers the dollar equivalent in revenue of these points until the points are applied or forfeited, which includes an estimate of the percentage of the unvested loyalty points that are expected to be forfeited. During the third quarter 2014, the Company modified the program to allow loyalty points to vest more quickly. The deferred revenue associated with the loyalty program at September 30, 2014 and December 31, 2013, respectively, was $9.8 million and $5.5 million. 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 $5.1 million and $2.7 million at September 30, 2014 and December 31, 2013, respectively.

Loyalty program
 
(in thousands)
 
Loyalty deferred revenue as of June 30, 2013
 
$
 
Loyalty points forfeited
   
(1,136
)
Loyalty points applied
   
(723
)
Loyalty points vested
   
5,072
 
Loyalty points unvested
   
2,243
 
Loyalty deferred revenue as of December 31, 2013
 
$
5,456
 

Loyalty deferred revenue as of January 1, 2014
 
$
5,456
 
Loyalty points forfeited
   
(3,392
)
Loyalty points applied
   
(8,616
)
Loyalty points vested
   
14,529
 
Loyalty points unvested
   
1,829
 
Loyalty deferred revenue as of  September 30, 2014
 
$
9,806
 

We estimate a sales return reserve for expected sales refunds based on our 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, our 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 averaged 1.5% or less of our gross sales. For the nine months ended September 30, 2014 our sales return reserve consisted of the following (in thousands):

Sales reserve as of January 1, 2014
 
$
238
 
Provision related to sales made in current period
   
1,149
 
Adjustment related to sales made in prior periods
   
10
 
Actual returns or credits related to current period
   
(916
)
Actual returns or credits related to prior periods
   
(249
)
Sales reserve as of September 30, 2014
 
$
232
 

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
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. Total revenue from freight and shipping fees were approximately $1.9 million for each of the three months ended September 30, 2014 and 2013, and $5.7 million for each of the nine months ended September 30, 2014 and 2013. Total freight costs for shipping products to our customers included in cost of sales were $1.8 million and $1.7 million for the three months ended September 30, 2014 and 2013, respectively, and $5.1 million and $5.0 million for the nine months ended September 30, 2014 and 2013, respectively.

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.

Total commissions and incentive expenses were approximately $21.0 million and $19.6 million for the three months ended September 30, 2014 and 2013, respectively, and $57.7 million and $56.4 million for the nine months ended September 30, 2014 and 2013, respectively.

Comprehensive Income (loss) and Accumulated Other Comprehensive Income (loss)

Comprehensive income (loss) 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 (loss) consists of the Company’s net income (loss), foreign currency translation adjustments from its Japan, Republic of Korea, Taiwan, Norway, Sweden, and Ukraine operations, and changes in the pension obligation for its Japanese employees.

NOTE 2: INVENTORIES

Inventories consist of raw materials and finished goods, which also includes promotional materials. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories at September 30, 2014 and December 31, 2013, consisted of the following (in thousands):

   
September 30, 2014
   
December 31, 2013
 
Raw materials
 
$
2,409
   
$
4,396
 
Finished goods
   
12,097
     
11,601
 
Inventory reserves for obsolescence
   
(2,039
)
   
(2,009
)
Total
 
$
12,467
   
$
13,988
 

NOTE 3: INCOME TAXES

For the three and nine months ended September 30, 2014, the Company’s effective tax rate was 27.6% and 48.0%, respectively. For the three and nine months ended September 30, 2013, the Company’s effective income tax rate was 548.3% and 54.7%, respectively. For the three and nine months ended September 30, 2014 and 2013, the Company’s effective tax rate was determined based on the estimated annual effective tax rate.

The effective tax rates for the three months ended September 30, 2014 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 included favorable rate differences from foreign jurisdictions due to the overall profitability improvement during this period.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
The effective tax rates for the nine months ended September 30, 2014 were higher than what would have been expected if the federal statutory rate were applied to income before taxes. Items increasing the effective income tax rate included the change in the valuation allowances associated with certain deferred tax assets and subpart F income resulting from controlled foreign corporation operations. In addition, in the second quarter 2014, it was determined a deemed intercompany dividend had occurred in 2012 and 2013 related to an intercompany working capital loan that originated in 2012; the Company recorded the expense, which is not material to the financial statements for the year. We have not initiated any further intercompany transactions like the 2012 transaction, nor do we anticipate the need for further transactions of this type.

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 2008 Stock Incentive Plan. In determining the potential dilution effect of outstanding stock options during the three months ended September 30, 2014 and 2013, the Company used the quarter’s average common stock close price of $13.29 and $19.48 per share, respectively. In determining the potential dilution effect of outstanding stock options during the nine months ended September 30, 2014 and 2013, the Company used the nine month average common stock close price of $15.03 and $11.68 per share, respectively. The Company reported net income for the three and nine months ended September 30, 2014. For the three and nine months ended September 30, 2014, approximately 0.1 million shares of the Company’s common stock subject to options were excluded from the diluted EPS calculation, as the 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 reserves up to 200,000 shares 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. At the 2014 Annual Shareholders’ Meeting, the 2008 Plan was amended again to increase the number of shares of common stock subject to the plan by 130,000. As of September 30, 2014, the 2008 Plan had 136,870 stock options available for grant before the plan expires on February 20, 2018.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the three months ended September 30, 2014 and 2013, the Company granted zero and 2,500 stock options, respectively. During the nine months ended September 30, 2014 and 2013, the Company granted 81,000 and 82,500 stock options, respectively. The fair value of stock options granted during the nine months ended September 30, 2014 ranged from $9.02 to $12.09 per share. Zero options were granted during the three months ended September 30, 2014.  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
 
 
2014
 
2013
 
2014
 
2013
 
Total gross compensation expense
 
$
95
   
$
41
   
$
397
   
$
137
 
Total tax benefit associated with compensation expense
   
20
     
6
     
101
     
27
 
Total net compensation expense
 
$
75
   
$
35
   
$
296
   
$
110
 

As of September 30, 2014, the Company expects to record compensation expense in the future as follows (in thousands):

Three months
ending
December 31,
         
Year ending December 31,
 
 
2014
 
2015
 
2016
   
2017
   
2018
 
Total gross unrecognized compensation expense
 
$
94
   
$
397
   
$
203
   
$
49
   
$
7
 
Tax benefit associated with unrecognized compensation expense
   
20
     
77
     
13
     
     
 
Total net unrecognized compensation expense
 
$
74
   
$
320
   
$
190
   
$
49
   
$
7
 

NOTE 6: SHAREHOLDERS’ EQUITY

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, displayed in the Consolidated Statement of Shareholders’ Equity and Comprehensive Loss, represents net loss 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 loss, are as follows (in thousands):
 
   
Foreign
Currency
Translation
   
Pension
Postretirement
Benefit
Obligation
   
Accumulated
Other
Comprehensive
Loss, Net
 
Balance as of December 31, 2013
 
$
(1,110
)
 
$
367
   
$
(743
)
Current-period change 1
   
455
     
     
455
 
Balance as of September 30, 2014
 
$
(655
)
   
367
     
(288
)
1 No amounts reclassified from accumulated other comprehensive loss

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 7: LITIGATION

Patent 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 their 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. A hearing date on the Motion for Preliminary Injunction has not been set. The Company and the Defendants have each filed their Initial Disclosures. On September 30, 2014, the Company filed its Initial Infringement Contentions.

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, and Xiong Lo, 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.  This matter remains open.

NOTE 8: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods to customers in an amount that reflects the consideration to which the entity expects in exchange for those goods. To achieve that core principle, an entity should apply the following steps:

-Step 1: Identify the contract(s) with a customer.
-Step 2: Identify the performance obligations in the contract.
-Step 3: Determine the transaction price.
-Step 4: Allocate the transaction price to the performance obligations in the contract.
-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The standard is effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures.) Early application is not permitted.   Management is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 9: 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 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, 2014.

The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of September 30, 2014.

Assets
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Funds – Fidelity, US
 
$
2,292
   
$
   
$
   
$
2,292
 
Interest bearing deposits – various banks
   
13,977
     
     
     
13,977
 
Total assets
 
$
16,269
   
$
   
$
   
$
16,269
 
Amounts included in:
                               
Cash and cash equivalents
 
$
9,462
   
$
   
$
   
$
9,462
 
Restricted cash
   
741
       —        —      
741
 
Long-term restricted cash
   
6,066
     
     
     
6,066
 
Total
 
$
16,269
   
$
   
$
   
$
16,269
 

NOTE 10: 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 products, and weight-management products through its network marketing distribution channels operating in twenty-three 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 associates and distributes its products through similar distribution channels in each country. No single associate has ever accounted for more than 10% of the Company’s consolidated net sales.

The Company operates facilities in eleven countries and sells product in twenty-three 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 and Singapore. Each facility services different geographic areas. We currently sell our products in three regions: (i) North America (the United States, Canada and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Taiwan, Hong Kong and Singapore). On March 21, 2014, the Company announced temporary suspension of operations in Ukraine, due to political turmoil and ongoing instability in the country.
 
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidated net sales shipped to customers in these regions, along with pack and product sales information for the three and nine months ended September 30, are as follows (in millions, except percentages):

   
Three months
   
Nine months
 
Region
 
2014
   
2013
   
2014
   
2013
 
North America
 
$
20.4
     
36.6
%
 
$
18.7
     
42.2
%
 
$
61.6
     
42.5
%
 
$
60.5
     
46.2
%
Asia/Pacific
   
30.3
     
54.6
%
   
22.0
     
49.5
%
   
70.9
     
48.9
%
   
59.7
     
45.6
%
EMEA
   
4.9
     
8.8
%
   
3.7
     
8.3
%
   
12.4
     
8.6
%
   
10.7
     
8.2
%
Totals
 
$
55.6
     
100.0
%
 
$
44.4
     
100.0
%
 
$
144.9
     
100.0
%
 
$
130.9
     
100.0
%
 
   
Three months
   
Nine months
 
   
2014
   
2013
   
2014
   
2013
 
Consolidated product sales
 
$
45.9
   
$
31.7
   
$
117.7
   
$
108.0
 
Consolidated pack sales
   
7.8
     
10.9
     
21.7
     
17.1
 
Consolidated other, including freight
   
1.9
     
1.8
     
5.5
     
5.8
 
Consolidated total net sales
 
$
55.6
   
$
44.4
   
$
144.9
   
$
130.9
 

Long-lived assets, which include property, equipment and construction in progress for the Company and its subsidiaries, reside in the following regions (in millions):

Region
 
September 30,
2014
   
December 31,
2013
 
North America
 
$
3.0
   
$
2.4
 
Asia/Pacific
   
0.9
     
0.4
 
EMEA
   
0.2
     
0.4
 
Total
 
$
4.1
   
$
3.2
 

Inventory balances by region, which consist of raw materials, work in progress, finished goods, and promotional materials, as offset by obsolete inventories, were as follows (in millions):
 
Region
 
September 30,
2014
   
December 31,
2013
 
North America
 
$
5.2
   
$
6.4
 
Asia/Pacific
   
5.1
     
5.3
 
EMEA
   
2.2
     
2.3
 
Total
 
$
12.5
   
$
14.0
 

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, 2014 as compared to the same period in 2013, 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.

COMPANY OVERVIEW

Since November 1993, we have continued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network marketing system. We operate in three regions: (i) North America (the United States, Canada and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan and Hong Kong). Our Switzerland office manages certain day-to-day business needs of non-North American markets.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 234,000 active independent associates and members who have purchased our products and/or packs within the last 12 months, who we refer to as active independent associates and members. New recruits and pack sales are leading indicators for the long-term success of our business. New recruits include new independent associates and members purchasing our packs and products for the first time. We operate as a seller of nutritional supplements, topical and skin care products, and weight-management products through our network marketing distribution channels operating in twenty-three countries. 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 active independent associates and members; 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 $11.2 million, or 25.2% during the three months ended September 30, 2014, as compared to the same period in 2013, and overall net sales increased $14.0 million, or 10.7% during the nine months ended September 30, 2014, as compared to the same period in 2013. Our operations outside of North America accounted for approximately 63.4% of our consolidated net sales.

The net sales comparisons for the three- and nine-month periods were affected by the launch of the Uth skin care product in the fourth quarter of 2013 in North America and in remaining markets during 2014 and the implementation of the loyalty program in the third quarter of 2013. Under the terms of the loyalty program, customers have one year following the vesting of their loyalty points to redeem such points for products; otherwise, the loyalty points are forfeited. We anticipated the third quarter of 2014 would have a higher rate of redemptions and forfeitures than previous quarters because loyalty points earned and vested from the start of the program became subject to forfeiture in the third quarter of 2014. These two items affected net sales comparability as follows:

· Net sales attributable to our Uth skin care product were $7.2 million and $11.5 million for the three and nine months ended September 30, 2014, respectively.

· The loyalty program increased third quarter 2014 net sales by $1.9 million and decreased net sales for the nine months ended September 30, 2014 by $1.8 million, as compared to the same periods in 2013.

Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales would have increased by $2.1 million, or 5.0% for the three months ended September 30, 2014, and by $4.3 million, or 3.3%, for the nine months ended September 30, 2014, as compared to the same periods in 2013.
 
RESULTS OF OPERATIONS

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended September 30, 2014 and 2013 (in thousands, except percentages):
 
   
2014
   
2013
    Change from
2014 to 2013
 
   
Total
dollars
   
% of
net sales
   
Total
dollars
   
% of
net sales
   
Dollar
   
Percentage
 
Net sales
 
$
55,635
     
100.0
%
 
$
44,432
     
100.0
%
 
$
11,203
     
25.2
%
Cost of sales
   
10,304
     
18.5
%
   
9,225
     
20.8
%
   
1,079
     
11.7
%
Gross profit
   
45,331
     
81.5
%
   
35,207
     
79.2
%
   
10,124
     
28.8
%
                                                 
Operating expenses:
                                               
Commissions and incentives
   
20,977
     
37.7
%
   
19,640
     
44.2
%
   
1,337
     
6.8
%
Selling and administrative expenses
   
9,567
     
17.2
%
   
8,497
     
19.1
%
   
1,070
     
12.6
%
Depreciation and amortization
   
441
     
0.8
%
   
474
     
1.1
%
   
(33
)
   
(7.0
)%
Other operating costs
   
6,149
     
11.1
%
   
6,167
     
13.9
%
   
(18
)
   
(0.3
)%
Total operating expenses
   
37,134
     
66.7
%
   
34,778
     
78.3
%
   
2,356
     
6.8
%
Income from operations
   
8,197
     
14.7
%
   
429
     
0.9
%
   
7,768
     
1,810.7
%
Interest income
   
25
     
0.0
%
   
25
     
0.1
%
   
0
     
0.0
%
Other expense, net
   
(1,167
)
   
(2.1
)%
   
(275
)
   
(0.6
)%
   
(892
)
   
324.4
%
Income before income taxes
   
7,055
     
12.7
%
   
179
     
0.4
%
   
6,876
     
3,841.3
%
Provision for income taxes
   
(1,947
)
   
(3.5
)%
   
(980
)
   
(2.2
)%
   
(967
)
   
98.7
%
Net income (loss)
 
$
5,108
     
9.2
%
 
$
(801
)
   
(1.8
)%
 
$
5,909
     
737.7
%

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2014 and 2013 (in thousands, except percentages):

   
2014
   
2013
   
Change from
2014 to 2013
 
   
Total
dollars
   
% of
net sales
   
Total
dollars
   
% of
net sales
   
Dollar
   
Percentage
 
Net sales
 
$
144,900
     
100.0
%
 
$
130,899
     
100.0
%
 
$
14,001
     
10.7
%
Cost of sales
   
29,440
     
20.3
%
   
25,616
     
19.6
%
   
3,824
     
14.9
%
Gross profit
   
115,460
     
79.7
%
   
105,283
     
80.4
%
   
10,177
     
9.7
%
                                                 
Operating expenses:
                                               
Commissions and incentives
   
57,727
     
39.8
%
   
56,362
     
43.1
%
   
1,365
     
2.4
%
Selling and administrative expenses
   
26,389
     
18.2
%
   
25,669
     
19.6
%
   
720
     
2.8
%
Depreciation and amortization
   
1,248
     
0.9
%
   
1,699
     
1.3
%
   
(451
)
   
(26.5
)%
Other operating costs
   
19,920
     
13.7
%
   
18,919
     
14.4
%
   
1,001
     
5.3
%
Total operating expenses
   
105,284
     
72.7
%
   
102,649
     
78.4
%
   
2,635
     
2.6
%
Income from operations
   
10,176
     
7.0
%
   
2,634
     
2.0
%
   
7,542
     
286.3
%
Interest income
   
61
     
0.0
%
   
29
     
0.0
%
   
32
     
110.3
%
Other expense, net
   
(1,311
)
   
(0.9
)%
   
(1,278
)
   
(0.9
)%
   
(33
)
   
2.6
%
Income before income taxes
   
8,926
     
6.2
%
   
1,385
     
1.1
%
   
7,541
     
544.5
%
Provision for income taxes
   
(4,282
)
   
(3.0
)%
   
(758
)
   
(0.6
)%
   
(3,524
)
   
464.9
%
Net income
 
$
4,644
     
3.2
%
 
$
627
     
0.5
%
 
$
4,017
     
640.7
%

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("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, Deferred Revenue, 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
 
September 30,
2014
   
September 30,
2013
   
Change
 
 
GAAP
Measure:
Total $
   
Non-GAAP
Measure:
Constant $
   
GAAP
Measure:
Total $
   
 
 
Dollar
   
 
 
Percent
 
Net Sales
   
55.6
     
54.4
     
44.4
     
10.0
     
22.5
%
Product
   
45.9
     
45.0
     
31.7
     
13.3
     
42.0
%
Pack
   
7.8
     
7.5
     
10.9
     
(3.4
)
   
(31.2
)%
Other
   
1.9
     
1.9
     
1.8
     
0.1
     
5.6
%
Deferred Revenue
   
12.8
     
12.8
     
5.3
     
7.5
     
141.5
%
Gross Profit
   
45.3
     
44.3
     
35.2
     
9.1
     
25.9
%
Income from Operations
   
8.2
     
7.6
     
0.4
     
7.2
     
1,800.0
%

Nine month period ended
 
September 30,
2014
   
September 30,
2013
   
Change
 
   
GAAP
Measure:
Total $
   
Non-GAAP
Measure:
Constant $
   
GAAP
Measure:
Total $
   
 
 
Dollar
   
 
 
Percent
 
Net Sales
   
144.9
     
144.7
     
130.9
     
13.8
     
10.5
%
Product
   
117.7
     
117.7
     
108.0
     
9.7
     
9.0
%
Pack
   
21.7
     
21.4
     
17.1
     
4.3
     
25.1
%
Other
   
5.5
     
5.6
     
5.8
     
(0.2
)
   
(3.4
)%
Gross Profit
   
115.5
     
115.1
     
105.3
     
9.8
     
9.3
%
Income from Operations
   
10.2
     
9.5
     
2.6
     
6.9
     
265.4
%

Consolidated net sales by region for the three months ended September 30, 2014 and 2013 were as follows (in millions, except percentages):

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

Region
 
2014
   
2013
 
North America
 
$
20.4
     
36.6
%
 
$
18.7
     
42.2
%
Asia/Pacific
   
30.3
     
54.6
%
   
22.0
     
49.5
%
EMEA
   
4.9
     
8.8
%
   
3.7
     
8.3
%
Total
 
$
55.6
     
100.0
%
 
$
44.4
     
100.0
%

Consolidated net sales by customer location for the nine months ended September 30, 2014 and 2013 were as follows (in millions, except percentages):

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

Region
 
2014
   
2013
 
North America
 
$
61.6
     
42.5
%
 
$
60.5
     
46.2
%
Asia/Pacific
   
70.9
     
48.9
%
   
59.7
     
45.6
%
EMEA
   
12.4
     
8.6
%
   
10.7
     
8.2
%
Total
 
$
144.9
     
100.0
%
 
$
130.9
     
100.0
%

Net Sales

Consolidated net sales for the three months ended September 30, 2014 increased by $11.2 million, or 25.2%, to $55.6 million as compared to the same period in 2013. Consolidated net sales for the nine months ended September 30, 2014 increased by $14.0 million, or 10.7%, to $144.9 million as compared to the same period in 2013.

North American sales increased by $1.7 million, or 9.1%, to $20.4 million for the three months ended September 30, 2014 as compared to the same period in 2013. North American sales increased by $1.1 million to $61.6 million for the nine months ended September 30, 2014 as compared to the same period in 2013. For the three and nine months ended September 30, 2014, revenue and revenue per active associate and member increased while the number of associates decreased.  Net sales comparisons for both the three- and nine-month periods were affected by the Uth skin care product launch in the fourth quarter of 2013 and the implementation of the loyalty program in the third quarter of 2013 (see Current Economic Conditions and Recent Developments for additional information).  Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales in North America would have declined by $0.4 million, or 2.1%, for the three months ended September 30, 2014, and by $3.1 million, or 5.1%, for the nine months ended September 30, 2014, as compared to the same periods in 2013.

For the three and nine months ended September 30, 2014, our operations outside of North America accounted for approximately 63.4% and 57.8%, respectively, of our consolidated net sales, whereas in the same period in 2013, our operations outside of North America accounted for approximately 53.2% and 53.8%, respectively, of our consolidated net sales.

Asia/Pacific sales increased by $8.3 million, or 37.7%, to $30.3 million for the three months ended September 30, 2014.  In constant dollars, net sales would have been $28.9 million, or 31.4%. The currency impact was primarily due to appreciation of the Korean Won.  For the three months ended September 30, 2014, compared to the same period in 2013, the number of active associates and members increased and the revenue per active associate and member increased. Net sales comparisons for the third quarter were affected by the Uth skin care product launch during 2014 and the implementation of the loyalty program in the third quarter of 2013 (see Current Economic Conditions and Recent Developments for additional information). Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales in Asia/Pacific would have increased by $1.5 million, or 6.8%, for the third quarter 2014 as compared to the same period in 2013.
 
Asia/Pacific sales increased by $11.2 million, or 18.8%, to $70.9 million for the nine months ended September 30, 2014 as compared to the same period in 2013. In constant dollars, net sales would have increased 16.6% to $69.6 million; the currency impact was primarily due to appreciation of the Korean Won, partially offset by the depreciation of the Japanese Yen and Australian Dollar. For the nine months ended September 30, 2014, compared to the same period in 2013, the number of active associates and members increased and the revenue per active associate and member increased.  Net sales comparisons for the nine months ended September 30 were affected by the Uth skin care product launch during 2014 and the implementation of the loyalty program in the third quarter of 2013 (see Current Economic Conditions and Recent Developments for additional information).  Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales in Asia/Pacific would have increased by $5.5 million, or 9.2%, for the nine months ended September 30, 2014 as compared to the same period in 2013.

EMEA sales increased by $1.2 million, or 32.4%, to $4.9 million for the three months ended September 30, 2014 as compared to the same period in 2013.  In constant dollars, net sales for the three months ended September 30, 2014 would have increased 37.8% to $5.1 million; the currency impact was primarily due to the South African Rand.  These sales increases were due to increases in active members and associates.  Net sales comparisons for the third quarter were affected by the Uth skin care product launch during 2014 and the implementation of the loyalty program in the third quarter of 2013 (see Current Economic Conditions and Recent Developments for additional information).  Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales in EMEA would have increased by $1.0 million, or 27.0%, for the third quarter 2014 as compared to the same period in 2013.

EMEA net sales increased by $1.7 million, or 15.9%, to $12.4 million for the nine months ended September 30, 2014 as compared to the same period in 2013. In constant dollars, net sales for the nine months ended September 30, 2014 would have increased 25.2% to $13.4 million; the currency impact was primarily due to the South African Rand.  These sales increases were due to increases in active members and associates.  Net sales comparisons for the nine months ended September 30 were affected by the Uth skin care product launch during 2014 and the implementation of the loyalty program in the third quarter 2013 (see Current Economic Conditions and Recent Developments for additional information).  Excluding the effects on net sales of the Uth skin care product launch and the loyalty program, net sales in EMEA would have increased by $1.9 million, or 17.8%, for the nine months ended September 30, 2014 as compared to the same period in 2013.
   
Fluctuation in foreign currency exchange rates for the three months ended September 30, 2014 had an overall favorable impact on our net sales of approximately $1.2 million, as appreciation of the Korean Won was partially offset by depreciation of the Japanese Yen and South African Rand. For the nine months ended September 30, 2014, fluctuation in foreign currency exchange had an overall favorable impact on our net sales of approximately $0.2 million. Gains from a stronger Korean Won were offset by losses from a weaker Japanese Yen, Australian Dollar, and South African Rand. The net sales impact is calculated as the difference between (1) the current period’s net sales in USD and (2) the current period’s net sales in local currencies converted to USD by applying average exchange rates for the same periods ended September 30, 2013.
 

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

· changes in our sales prices;
 
· changes in consumer demand;
 
· changes in the number of associates and members;
 
· 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.

Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages):

   
Three Months
   
Change
 
   
2014
   
2013
   
Dollar
   
Percentage
 
Consolidated product sales
 
$
45.9
   
$
31.7
   
$
14.2
     
44.8
%
Consolidated pack sales
   
7.8
     
10.9
     
(3.1
)
   
(28.4
)%
Consolidated other, including freight
   
1.9
     
1.8
     
0.1
     
5.6
%
Total consolidated net sales
 
$
55.6
   
$
44.4
   
$
11.2
     
25.2
%

   
Nine Months
   
Change
 
   
2014
   
2013
   
Dollar
   
Percentage
 
Consolidated product sales
 
$
117.7
   
$
108.0
   
$
9.7
     
9.0
%
Consolidated pack sales
   
21.7
     
17.1
     
4.6
     
26.9
%
Consolidated other, including freight
   
5.5
     
5.8
     
(0.3
)
   
(5.2
)%
Total consolidated net sales
 
$
144.9
   
$
130.9
   
$
14.0
     
10.7
%

Pack sales correlate to new associates who purchase starter packs and to continuing associates who purchase upgrade or renewal packs. However, there is no direct correlation between product sales and the number of new and continuing associates and members because associates and members utilize products at different volumes.

Product Sales

Product sales for the three months ended September 30, 2014 increased $14.2 million or 44.8% from the same period in 2013 driven by a 22.7% increase in orders. The average order value for the three months ended September 30, 2014 was $182 as compared to $150 for the same period in 2013, and this increase in average order value resulted in increased revenue.
 
Product sales for the nine months ended September 30, 2014 increased by $9.7 million, or 9.0%, as compared to the same period in 2014 driven by a 7.8% increase in orders. The average order value for the nine months ended September 30, 2014 was $169, as compared to $152 for the same period in 2013, and this increase in order value resulted in increased revenue.

In our loyalty program, we defer the dollar equivalent in revenue of loyalty points until we recognize revenue for the points that are applied or forfeited (see Revenue Recognition and Deferred Commissions in Note 1). This quarter, as our customers are utilizing more loyalty points, we are able to recognize more revenue compared to the same period last year, and the difference resulted in a $1.9 million increase in revenue for the three months ending September 30, 2014. Last year, as we started the loyalty program, we deferred more revenue than we recognized for transactions subject to the program. At September 30, 2014, we deferred $12.8 million revenue, which is a $7.5 million increase from the same period last year (see Revenue Recognition and Deferred Commissions in Note 1).

Pack Sales

Packs may be purchased by our associates who wish to build a Mannatech business. These packs are offered to our associates at a discount from published retail prices. There are several pack options available to our associates. In certain 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 can also purchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and eligibility for additional commissions and incentives. Many of our business-building associates also choose to purchase renewal packs to satisfy annual renewal requirements to continue to earn various commissions.

The dollar amount of pack sales associated with new and continuing associates was as follows, for the three and nine months ended September 30 (in millions, except percentages):

 
Three Months
 
Change
 
 
2014
 
2013
 
Dollar
   
Percentage
 
New
 
$
2.4
   
$
2.9
   
$
(0.5
)
   
(17.2
)%
Continuing
   
5.4
     
8.0
     
(2.6
)
   
(32.5
)%
Total
 
$
7.8
   
$
10.9
   
$
(3.1
)
   
(28.4
)%

 
Nine Months
 
Change
 
 
2014
 
2013
 
Dollar
   
Percentage
 
New
 
$
6.8
   
$
6.8
   
$
     
%
Continuing
   
14.9
     
10.3
     
4.6
     
44.7
%
Total
 
$
21.7
   
$
17.1
   
$
4.6
     
26.9
%

Total pack sales for the three months ended September 30, 2014 decreased by $3.1 million, or 28.4%, to $7.8 million, as compared to $10.9 million for the same period in 2013. Last year we modified the compensation plan, which incented third quarter sales. Average pack value for the three months ended September 30, 2014 was $201 as compared to $274 for the same period in 2013. During the three month period ended September 30, 2014, the total number of packs sold decreased by 900, or 2.3%, to 38,700.

Total pack sales for the nine months ended September 30, 2014 increased by $4.6 million, or 26.9%, to $21.7 million, as compared to $17.1 million for the same period in 2013. Average pack value for the nine months ended September 30, 2014 was $230, as compared to $198 for the same period in 2013. The total number of packs sold increased by 8,400, or 9.7%, to 94,600.

Recruiting increased 0.7% in the third quarter of 2014 as compared to the third quarter of 2013. The number of new independent associates and members for the third quarter of 2014 was approximately 29,000, as compared to 28,800 in 2013.
 
The approximate number of new and continuing independent associates and members who purchased our packs or products during the twelve months ended September 30, 2014 and 2013 were as follows:

   
2014
   
2013
 
New