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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Mannatech, Incorporated    MTEX

MANNATECH, INCORPORATED

(MTEX)
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MANNATECH : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/07/2019 | 05:28pm EDT
The following discussion is intended to assist in the understanding of our
consolidated financial position and results of operations for the three and six
months ended June 30, 2019 as compared to the same periods in 2018, and should
be read in conjunction with Item 1 "Financial Statements" in Part I of this
quarterly report on Form 10-Q. Unless stated otherwise, all financial
information presented below, throughout this report, and in the consolidated
financial statements and related notes includes Mannatech and all of our
subsidiaries on a consolidated basis.  To supplement our financial results
presented in accordance with GAAP, we disclose certain adjusted financial
measures which we refer to as Constant dollar ("Constant dollar") measures,
which are non-GAAP financial measures. Refer to the Non-GAAP Financial Measures
section herein for a description of how such Constant dollar measures are
determined.

COMPANY OVERVIEW


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

We conduct our business as a single operating segment and primarily sell our
products through a network of approximately 175,000 active associates and
preferred customer positions held by individuals that had purchased our products
and/or packs or paid associate fees during the last 12 months, who we refer to
as current associates and preferred customers. New pack sales and the receipt of
new associate fees in connection with new positions in our network are leading
indicators for the long-term success of our business. New associate or preferred
customer positions are created in our network when our associate fees are paid
or packs and products are purchased for the first time under a new account. We
operate as a seller of nutritional supplements, topical and skin care and
anti-aging products, and weight-management products through our network
marketing distribution channels operating in 25 countries and direct e-commerce
retail in China. We review and analyze net sales by geographical location and by
packs and products on a consolidated basis. Each of our subsidiaries sells
similar products and exhibits similar economic characteristics, such as selling
prices and gross margins.

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

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

Current Economic Conditions and Recent Developments


Overall net sales decreased $4.4 million, or 9.8%, to $40.7 million, during the
three months ended June 30, 2019, as compared to the same period in 2018. Net
sales for the six months ended June 30, 2019 decreased by $7.8 million, or 9.1%,
to $78.7 million, as compared to the same period in 2018. For the three and six
months ended June 30, 2019, our net sales declined 5.5% and 5.3%, respectively,
on a Constant dollar basis (see Non-GAAP Measures, below); unfavorable foreign
exchange during the three and six months ended June 30, 2019, caused a $1.9
million and $3.2 million decrease, respectively, in GAAP net sales, as compared
to the same period in 2018. For the three and six months ended June 30, 2019,
our operations outside of the Americas accounted for approximately 69.5% and
69.0%, respectively, of our consolidated net sales.

The net sales comparisons for the three and six months ended June 30, 2019 and
June 30, 2018 were primarily affected by management's decision to conduct
Mannafest, an annual associate recognition and training event, as a regional
event in 2019 instead of an international event, as it was in 2018. Sales from
this event decreased by $3.1 million, or 76%, to $1.0 million during the three
and six months ended June 30, 2019, as compared to the same periods in 2018.
This regional event also reduced selling and administrative expenses in the
current year.
Excluding the effects due to the translation of foreign currencies into U.S.
dollars, net sales would have decreased $2.5 million and $4.6 million,
respectively, for the three and six months ended June 30, 2019, as compared to
the same periods in 2018. These adjusted net sales expressed in Constant dollars
are a non-GAAP financial measure discussed in further detail below.


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RESULTS OF OPERATIONS

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018


The table below summarizes our consolidated operating results in dollars and as
a percentage of net sales for the three months ended June 30, 2019 and 2018 (in
thousands, except percentages):
                                                                                      Change from
                                     2019                      2018                   2019 to 2018
                              Total         % of        Total         % of
                             dollars     net sales     dollars     net sales      Dollar     Percentage
Net sales                   $ 40,711       100.0  %   $ 45,137       100.0  %   $ (4,426 )       (9.8 )%
Cost of sales                  8,115        19.9  %      8,141        18.0  %        (26 )       (0.3 )%
Gross profit                  32,596        80.1  %     36,996        82.0  %     (4,400 )      (11.9 )%

Operating expenses:
Commissions and incentives    16,295        40.0  %     19,322        42.8  %     (3,027 )      (15.7 )%
Selling and administrative
expenses                       8,381        20.6  %      9,615        21.3  %     (1,234 )      (12.8 )%
Depreciation and
amortization expense             517         1.3  %        535         1.2  %        (18 )       (3.4 )%
Other operating costs          5,384        13.2  %      7,873        17.4  %     (2,489 )      (31.6 )%
Total operating expenses      30,577        75.1  %     37,345        82.7  %     (6,768 )      (18.1 )%
Income from operations         2,019         5.0  %       (349 )      (0.8 )%      2,368       (678.5 )%
Interest income                   25         0.1  %        133         0.3  %       (108 )       81.2  %
Other income, net                980         2.4  %        476         1.1  %        504        105.9  %
Income before income taxes     3,024         7.4  %        260         0.6  %      2,764      1,063.1  %
Provision for income taxes    (1,037 )      (2.5 )%       (644 )      (1.4 )%       (393 )       61.0  %
Net income (loss)           $  1,987         4.9  %   $   (384 )      (0.9 )%   $  2,371       (617.4 )%




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Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018


The table below summarizes our consolidated operating results in dollars and as
a percentage of net sales for the six months ended June 30, 2019 and 2018 (in
thousands, except percentages):

                                                                                        Change from
                                      2019                       2018                   2019 to 2018
                               Total         % of         Total         % of
                              dollars     net sales      dollars     net sales      Dollar     Percentage
Net sales                    $ 78,684       100.0  %   $  86,520       100.0  %   $ (7,836 )       (9.1 )%
Cost of sales                  15,542        19.8  %      16,390        18.9  %       (848 )       (5.2 )%
Gross profit                   63,142        80.2  %      70,130        81.1  %     (6,988 )      (10.0 )%

Operating expenses:
Commissions and incentives     31,494        40.0  %      36,307        42.0  %     (4,813 )      (13.3 )%
Selling and administrative
expenses                       15,957        20.3  %      17,595        20.3  %     (1,638 )       (9.3 )%
Depreciation and
amortization expense            1,045         1.3  %       1,046         1.2  %         (1 )       (0.1 )%
Other operating costs          11,507        14.6  %      16,419        19.0  %     (4,912 )      (29.9 )%
Total operating expenses       60,003        76.3  %      71,367        82.5  %    (11,364 )      (15.9 )%
Income from operations          3,139         4.0  %      (1,237 )      (1.4 )%      4,376       (353.8 )%
Interest income                   (70 )      (0.1 )%         162         0.2  %       (232 )     (143.2 )%
Other income, net                 984         1.3  %         764         0.9  %        220         28.8  %
Income before income taxes      4,053         5.2  %        (311 )      (0.4 )%      4,364     (1,403.2 )%
Provision for income taxes     (1,378 )      (1.8 )%        (337 )      (0.4 )%     (1,041 )      308.9  %
Net income (loss)            $  2,675         3.4  %   $    (648 )      (0.7 )%   $  3,323       (512.8 )%





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Non-GAAP Financial Measures


To supplement our financial results presented in accordance with GAAP, we
disclose operating results that have been adjusted to exclude the impact of
changes due to the translation of foreign currencies into U.S. dollars,
including changes in: Net Sales, Gross Profit, and Income from Operations. We
refer to these adjusted financial measures as Constant dollar items, which are
non-GAAP financial measures. We believe these measures provide investors an
additional perspective on trends. To exclude the impact of changes due to the
translation of foreign currencies into U.S. dollars, we calculate current year
results and prior year results at a constant exchange rate, which is the prior
year's rate. Currency impact is determined as the difference between actual
growth rates and constant currency growth rates.
Three-month period
ended
(in millions, except
percentages)                    June 30, 2019             June 30, 2018          Constant $ Change
                             GAAP          Non-GAAP            GAAP
                           Measure:        Measure:          Measure:
                           Total $        Constant $         Total $           Dollar         Percent
Net sales               $       40.7$      42.6     $         45.1     $      (2.5 )        (5.5 )%
Product                         39.9            41.7               44.5            (2.8 )        (6.3 )%
Pack sales and
associate fees                   0.6             0.6                0.6               -             -  %
Other                            0.2             0.2                  -             0.2             -  %
Gross profit                    32.6            34.1               37.0            (2.9 )        (7.8 )%
Income from operations           2.0             2.4               (0.3 )           2.7        (900.0 )%



Six-month period ended
(in millions, except
percentages)                     June 30, 2019             June 30, 2018         Constant $ Change
                              GAAP          Non-GAAP           GAAP
                            Measure:        Measure:         Measure:
                            Total $        Constant $         Total $          Dollar         Percent
Net sales                $       78.7$      81.9$        86.5$      (4.6 )        (5.3 )%
Product                          77.1            80.3              85.5            (5.2 )        (6.1 )%
Pack sales and associate
fees                              1.2             1.2               1.1             0.1           9.1  %
Other                             0.4             0.4              (0.1 )           0.5        (500.0 )%
Gross profit                     63.1            65.7              70.1            (4.4 )        (6.3 )%
Income from operations            3.1             3.8              (1.2 )           5.0        (416.7 )%



Net Sales

Consolidated net sales for the three months ended June 30, 2019 decreased by
$4.4 million, or 9.8%, to $40.7 million as compared to $45.1 million for the
same period in 2018. Consolidated net sales for the six months ended June 30,
2019 decreased by $7.8 million, or 9.1%, to $78.7 million, as compared to $86.5
million for the same period in 2018.

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

Consolidated net sales by region for the three months ended June 30, 2019 and 2018 were as follows (in millions, except percentages):

                 Three Months Ended           Three Months Ended
Region             June 30, 2019                June 30, 2018
Americas     $    12.4           30.5 %   $    17.3           38.4 %
Asia/Pacific      24.8           60.9 %        24.5           54.3 %
EMEA               3.5            8.6 %         3.3            7.3 %
Total        $    40.7          100.0 %   $    45.1          100.0 %



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Consolidated net sales by region for the six months ended June 30, 2019 and 2018 were as follows (in millions, except percentages):

                 Six Months Ended           Six Months Ended
Region            June 30, 2019              June 30, 2018
Americas     $    24.4         31.0 %   $    31.0         35.8 %
Asia/Pacific      47.6         60.5 %        48.7         56.3 %
EMEA               6.7          8.5 %         6.8          7.9 %
Total        $    78.7        100.0 %   $    86.5        100.0 %




For the three months ended June 30, 2019, net sales in the Americas decreased by
$4.9 million, or 28.3%, to $12.4 million, as compared to $17.3 million for the
same period in 2018. This decrease was primarily due to a 76% decline in
Mannafest sales resulting from management's decision to conduct Mannafest as a
regional instead of an international event. For the three months ended June 30,
2019, there was an 11.9% decline in revenue per active independent associate and
preferred customer as well as an 18.6% decrease in the number of active
independent associates and preferred customers.

For the six months ended June 30, 2019, net sales in the Americas decreased by
$6.6 million, or 21.3%, to $24.4 million, as compared to $31.0 million for the
same period in 2018. This decrease was primarily due to a 76% decline in
Mannafest sales resulting from management's decision to conduct Mannafest as a
regional instead of an international event. For the six months ended June 30,
2019, there was a 3.3% decline in revenue per active independent associate and
preferred customer and a 10.4% decrease in the number of active independent
associates and preferred customers.

For the three months ended June 30, 2019, our operations outside of the Americas
accounted for approximately 69.5% of our consolidated net sales, whereas in the
same period in 2018, our operations outside of the Americas accounted for
approximately 61.6% of our consolidated net sales.

For the six months ended June 30, 2019, our operations outside of the Americas
accounted for approximately 69.0% of our consolidated net sales, whereas in the
same period in 2018, our operations outside of the Americas accounted for
approximately 64.2% of our consolidated net sales.

For the three months ended June 30, 2019, Asia/Pacific net sales increased by
$0.3 million, or 1.2%, to $24.8 million, as compared to $24.5 million for the
same period in 2018. This increase was primarily due to a 12.5% increase in
revenue per active independent associate and preferred customer and partially
offset by a 10% decrease in the number of active independent associates and
preferred customers. Foreign currency exchange had the effect of decreasing
revenue by $1.5 million for the three months ended June 30, 2019, as compared to
the same period in 2018. The currency impact is primarily due to the weakening
of the Korean Won, Australian Dollar, Japanese Yen, Chinese Yuan (Renminbi),
Taiwanese Dollar, New Zealand Dollar, Singapore Dollar, and partially offset by
the strengthening of the Hong Kong Dollar.

For the six months ended June 30, 2019, Asia/Pacific net sales decreased by $1.1
million, or 2.3%, to $47.6 million, as compared to $48.7 million for the same
period in 2018. This decrease was primarily due to an 11.1% decrease in the
number of active independent associates and preferred customers, which was
partially offset by an 8.6% increase in revenue per active independent associate
and preferred customer. During the six months ended June 30, 2019, foreign
currency exchange had the effect of decreasing revenue by $2.3 million, as
compared to the same period in 2018. The currency impact is primarily due to the
weakening of the Korean Won, Japanese Yen, Australian Dollar, Chinese Yuan
(Renminbi), Taiwanese Dollar, Singapore Dollar, New Zealand Dollar, and the Hong
Kong Dollar.

For the three months ended June 30, 2019, EMEA net sales increased by $0.2
million, or 6.1%, to $3.5 million, as compared to $3.3 million for the same
period in 2018. This increase was primarily due to a 16.7% increase in revenue
per active independent associate and preferred customer, which was partially
offset by a 9.1% decrease in the number of active independent associates and
preferred customers. Foreign currency exchange had the effect of decreasing
revenue by $0.4 million for the three-month period ending June 30, 2019 as
compared to the same period in 2018.  The currency impact is primarily due to
the weakening of the South Africa Rand, the British Pound, and the Euro.

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For the six months ended June 30, 2019, EMEA net sales decreased by $0.1
million, or 1.5%, to $6.7 million, as compared to $6.8 million for the same
period in 2018. This decrease was primarily due to foreign currency exchange
decreasing revenue by $0.9 million, which was partially offset by a 0.1%
increase in the number of active independent associates and preferred customers
and an 8.4% increase in revenue per active independent associate and preferred
customer. The currency impact is primarily due to the weakening of the South
African Rand, the Euro and the British Pound.


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

• changes in our sales prices;

• changes in shipping fees;

• changes in consumer demand;

• changes in the number of independent associates and preferred customers;

• changes in competitors' products;

• changes in economic conditions;

• changes in regulations;

• announcements of new scientific studies and breakthroughs;

• introduction of new products;

• discontinuation of existing products;

• adverse publicity;

• changes in our commissions and incentives programs;

• direct competition; and

• fluctuations in foreign currency exchange rates.

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

                                          Three Months Ended
                                               June 30,                       Change
                                         2019            2018          Dollar       Percentage
Consolidated product sales           $      39.9$     44.5$     (4.6 )       (10.3 )%
Consolidated pack sales and
associate fees                               0.6            0.6              -             -  %
Consolidated other                           0.2              -            0.2             -  %
Total consolidated net sales         $      40.7$     45.1$     (4.4 )        (9.8 )%



                                               Six Months Ended
                                                   June 30,                    Change
                                                2019          2018      Dollar    Percentage
Consolidated product sales                 $    77.1$ 85.5$ (8.4 )       (9.8 )%
Consolidated pack sales and associate fees       1.2           1.1        0.1          9.1  %
Consolidated other                               0.4          (0.1 )      0.5       (500.0 )%
Total consolidated net sales               $    78.7$ 86.5$ (7.8 )       (9.0 )%





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Product Sales


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

Product sales for the three months ended June 30, 2019 decreased by $4.6
million, or 10.3%, as compared to the same period in 2018. The decrease in
product sales was primarily due to a decrease in the average order value and
number of orders. The average order value for the three months ended June 30,
2019 was $194, as compared to $205 for the same period in 2018. The number of
orders processed during the three months ended June 30, 2019 decreased by 3.7%,
as compared to the same period in 2018.

Product sales for the six months ended June 30, 2019 decreased by $8.4 million,
or 9.8%, as compared to the same period in 2018. The decrease in product sales
was primarily due to the decrease in the average order value and number of
orders. The average order value for the six months ended June 30, 2019 was $188,
as compared to $201 for the same period in 2018. The number of orders processed
during the six months ended June 30, 2019 decreased by 2.9%, as compared to the
same period in 2018.

Pack Sales and Associate Fees


The Company collects associate fees in lieu of selling packs in certain markets.
Associate fees are paid annually by new and continuing associates to the
Company, which entitle them to earn commissions, benefits and incentives for
that year. The Company collected associate fees in lieu of pack sales within the
United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore,
Hong Kong, Taiwan, Austria, the Czech Republic, Denmark, Estonia, Finland,
Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, Spain,
Sweden and the United Kingdom.

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

The dollar amount of pack sales and associate fees associated with new and
continuing independent associate positions held by individuals in our network
was as follows, for the three and six months ended June 30, (in millions, except
percentages):
                Three Months Ended
                     June 30,                     Change
                  2019            2018     Dollar    Percentage
New        $     0.2$ 0.2    $     -        - %
Continuing       0.4               0.4          -        - %
Total      $     0.6$ 0.6    $     -        - %



                Six Months Ended
                    June 30,                    Change
                 2019           2018     Dollar    Percentage
New        $     0.3$ 0.4$ (0.1 )      (25.0 )%
Continuing       0.9             0.7       0.2         28.6  %
Total      $     1.2$ 1.1$  0.1          9.1  %





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Total pack sales and associate fees for the three months ended June 30, 2019
remained constant at $0.6 million, as compared to the same period in 2018.
Average pack and associate fee value for the three months ended June 30, 2019
was $24, as compared to $25 for the same period in 2018. The total number of
packs and associate fees sold increased by 821, or 3.5%, to 24,600 for the three
months ended June 30, 2019, as compared to the same period in 2018.

Total pack sales and associate fees for the six months ended June 30, 2019
increased by $0.1 million, or 9.1%, to $1.2 million, as compared to $1.1 million
for the same period in 2018. Average pack and associate fee value for the six
months ended June 30, 2019 was $24, as compared to $25 for the same period in
2018. The total number of packs and associate fees sold increased by 4,431, or
10.0%, to 48,948 for the six months ended June 30, 2019, as compared to the same
period in 2018.

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

During 2018 and continuing into 2019, we took the following actions to recruit
and retain associates and preferred customers:
•         registered our most popular products with the appropriate regulatory

agencies in all countries of operations;

• rolled out new products;

• continued an aggressive marketing and educational campaign;

• continued to strengthen compliance initiatives;


•         concentrated on publishing results of research studies and clinical
          trials related to our products;

• initiated additional incentives;


•         continued to explore new advertising and educational tools to broaden
          name recognition; and

• implemented changes to our global associate career and compensation plan.




The approximate number of new and continuing active independent associates and
preferred customers who purchased our packs or products or paid associate fees
during the twelve months ended June 30, 2019 and 2018 were as follows:

                  2019                 2018
New         87,000     49.7 %    86,000     42.6 %
Continuing  88,000     50.3 %   116,000     57.4 %
Total      175,000    100.0 %   202,000    100.0 %



Recruitment of new independent associates and preferred customers decreased 5.9%
in the second quarter of 2019, as compared to the second quarter of 2018. The
number of new independent associate and preferred customer positions held by
individuals in our network for the second quarter of 2019 was approximately
20,084, as compared to 21,353 for the same period in 2018.

Other Sales


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

For the three months ended June 30, 2019 and 2018, other sales were $0.2 million.

For the six months ended June 30, 2019 and 2018, other sales were $0.4 million.

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Gross Profit


For the three months ended June 30, 2019, gross profit decreased by $4.4
million, or 11.9%, to $32.6 million, as compared to $37.0 million for the same
period in 2018. For the three months ended June 30, 2019, gross profit as a
percentage of net sales decreased to 80.1%, as compared to 82.0% for the same
period in 2018 due to increased inventory write-offs.

For the six months ended June 30, 2019, gross profit decreased by $7.0 million,
or 10.0% to $63.1 million, as compared to $70.1 million for the same period in
2018. For the six months ended June 30, 2019, gross profit as a percentage of
net sales decreased to 80.2%, as compared to 81.1% for the same period in 2018
due to increased inventory write-offs.

Commissions and Incentives


Commission expenses for the three months ended June 30, 2019 decreased by 18.2%,
or $3.3 million, to $15.1 million, as compared to $18.4 million for the same
period in 2018. This decrease includes a one-time adjustment of $0.7 million to
release the liability for vouchers no longer eligible for payout. For the three
months ended June 30, 2019, commissions as a percentage of net sales decreased
to 37.0% from 40.8% for the same period in 2018.

Commission expenses for the six months ended June 30, 2019 decreased by 13.4%,
or $4.6 million, to $30.0 million, as compared to $34.6 million for the same
period in 2018. This decrease includes a one-time adjustment of $1.2 million to
release the liability for vouchers no longer eligible for payout. For the six
months ended June 30, 2019, commissions as a percentage of net sales decreased
to 38.1% from 40.0% for the same period in 2018.

Incentive costs for the three months ended June 30, 2019 increased by 36.6%, or
$0.3 million, to $1.2 million, as compared to $0.9 million for the same period
in 2018. This increase is related to incentives in Asia/Pacific. For the three
months ended June 30, 2019, incentives as a percentage of net sales increased to
3.0% from 2.0% for the same period in 2018.

Incentive costs for the six months ended June 30, 2019 decreased by 10.1%, or
$0.2 million, to $1.5 million, as compared to $1.7 million for the same period
in 2018. This decrease is related to incentives in the Americas and EMEA. For
the six months ended June 30, 2019 and 2018, incentives as a percentage of net
sales were 1.9%.

Selling and Administrative Expenses

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


For the three months ended June 30, 2019, selling and administrative expenses
decreased by $1.2 million, or 12.8%, to $8.4 million, as compared to $9.6
million for the same period in 2018. The decrease in selling and administrative
expenses consisted of a $0.6 million decrease in marketing costs associated with
management's decision to conduct Mannafest as a regional event instead of an
international event, a $0.4 million decrease in stock-based compensation expense
and a $0.3 million decrease in distribution and warehouse costs, which was
partially offset by a $0.2 million increase in payroll costs related to an
increase in bonus accruals. Selling and administrative expenses, as a percentage
of net sales, for the three months ended June 30, 2019 decreased to 20.6% from
21.3% for the same period in 2018.

For the six months ended June 30, 2019, selling and administrative expenses
decreased by $1.6 million, or 9.3%, to $16.0 million, as compared to $17.6
million for the same period in 2018. The decrease in selling and administrative
expenses consisted of a $1.3 million decrease in marketing costs associated with
management's decision to conduct Mannafest as a regional event instead of an
international event, a $0.3 million decrease in stock-based compensation expense
and a $0.4 million decrease in distribution and warehouse costs, which was
partially offset by a $0.5 million increase in payroll costs related to an
increase in bonus accruals. Selling and administrative expenses, as a percentage
of net sales, for the six months ended June 30, 2019 and 2018 were both 20.3%.



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Other Operating Costs

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


For the three months ended June 30, 2019, other operating costs decreased by
$2.5 million, or 31.6%, to $5.4 million, as compared to $7.9 million for the
same period in 2018. For the three months ended June 30, 2019, other operating
costs as a percentage of net sales decreased to 13.2% from 17.4% for the same
period in 2018. The decrease in operating costs was primarily due to a $1.1
million decrease in travel and entertainment costs associated with management's
decision to conduct Mannafest as a regional event instead of an international
event, a $0.7 million decrease in office expenses due to the corporate office
relocating during 2018, and a $0.3 million decrease in legal and consulting
fees.

For the six months ended June 30, 2019, other operating costs decreased by $4.9
million, or 29.9%, to $11.5 million, as compared to $16.4 million for the same
period in 2018. For the six months ended June 30, 2019, other operating costs as
a percentage of net sales decreased to 14.6% from 19.0% for the same period in
2018. The decrease in operating costs was primarily due to a $2.0 million
decrease in office expenses due to the corporate office relocation during 2018,
a $1.9 million dollar decrease in travel and entertainment costs associated with
management's decision to conduct Mannafest as a regional event instead of an
international event and a $0.5 million decrease in legal and consulting fees.


Depreciation and Amortization Expense

Depreciation and amortization expense was $0.5 million for each of the three months ended June 30, 2019 and 2018.

Depreciation and amortization expense was $1.0 million for each of the six months ended June 30, 2019 and 2018.

Other Income, Net


Other income was $1.0 million for the three months ended June 30, 2019. Other
income included a $1.1 million VAT refund, which was offset by foreign exchange
gains and losses. Other income was $0.5 million for the three months ended
June 30, 2018, which was due to foreign exchange gains and losses.

Other income was $1.0 million for the six months ended June 30, 2019. Other income included a $1.1 million VAT refund, which was offset by foreign exchange gains and losses. Other income was $0.8 million for the six months ended June 30, 2018, which was due to foreign exchange gains and losses.

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Income Tax Benefit (Provision)


Provision (benefit) for income taxes include current and deferred income taxes
for both our domestic and foreign operations. Our statutory income tax rates by
jurisdiction are as follows, for both the three and six months ended June 30,
2018 and 2019:

Country            2019     2018
Australia         30.0 %   30.0 %
Canada            26.5 %   26.5 %
China             25.0 %   25.0 %
Colombia          33.0 %   33.0 %
Cyprus            12.5 %   12.5 %
Denmark           22.0 %   22.0 %
Gibraltar         10.0 %   10.0 %
Hong Kong         16.5 %   16.5 %
Japan             30.2 %   34.8 %
Mexico            30.0 %   30.0 %
Norway            23.0 %   23.0 %
Republic of Korea 22.0 %   25.0 %
Russia(1)         20.0 %   20.0 %
Singapore         17.0 %   17.0 %
South Africa      28.0 %   28.0 %
Sweden            22.0 %   22.0 %
Switzerland        9.2 %   16.2 %
Taiwan            20.0 %   20.0 %
Ukraine(2)        18.0 %   18.0 %
United Kingdom    19.0 %   19.0 %
United States     23.8 %   24.0 %


(1)On Aug 1, 2016, the Company established a legal entity in Russia called
Mannatech RUS Ltd., but currently does not operate in Russia.
(2)On Mar 21, 2014, the Company suspended operations in Ukraine, but maintains
the legal entity, Mannatech Ukraine LLC.
Income from our international operations is subject to taxation in the countries
in which we operate. Although we may receive foreign income tax credits that
would reduce the total amount of income taxes owed in the United States, we may
not be able to fully utilize our foreign income tax credits in the United
States.

We use the recognition and measurement provisions of the FASB ASC Topic 740,
Income Taxes ("Topic 740"), to account for income taxes. The provisions of Topic
740 require a company to record a valuation allowance when the "more likely than
not" criterion for realizing net deferred tax assets cannot be met. Furthermore,
the weight given to the potential effect of such evidence should be commensurate
with the extent to which it can be objectively verified. As a result, we
reviewed the operating results, as well as all of the positive and negative
evidence related to realization of such deferred tax assets to evaluate the need
for a valuation allowance in each tax jurisdiction.

The provision for income taxes is directly related to our profitability and
changes in the taxable income among countries of operation. For the three and
six months ended June 30, 2019, the Company's effective tax rate was 34.3% and
34.0%, respectively. For the three and six months ended June 30, 2018, the
Company's effective tax rate was (359.8)% and (44.6)%, respectively. For the
three and six months ended June 30, 2019 and 2018, the Company's effective tax
rate was determined based on the estimated annual effective income tax rate.

The effective tax rates for the three and six months ended June 30, 2019 were
different from the federal statutory rate due primarily to the mix of earnings
across jurisdictions and the associated valuation allowance recorded on losses
in certain jurisdictions.

The effective tax rates for the three and six months ended June 30, 2018 were
different from the federal statutory rate due to a mix of earnings across
jurisdictions and the associated valuation allowance recorded on foreign losses
in certain jurisdictions and the impact of global intangible low-tax income
("GILTI") as a result of the Tax Cuts and Jobs Act ("TCJA").

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LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents


As of June 30, 2019, our cash and cash equivalents increased by 14.5%, or $3.2
million, to $25.0 million from $21.8 million as of December 31, 2018. The
Company is required to restrict cash for direct selling insurance premiums and
credit card sales in the Republic of Korea. The current portion of restricted
cash balances were $1.5 million at each of June 30, 2019 and December 31, 2018.
The long-term portion of restricted cash balances were $5.3 million and $7.2
million at June 30, 2019 and 2018, respectively. Finally, fluctuations in
currency rates produced a decrease of $0.6 million and a decrease of $1.7
million in cash and cash equivalents for the six months ended June 30, 2019 and
2018, respectively.

Our principal use of cash is to pay for operating expenses, including
commissions and incentives, capital assets, inventory purchases, and periodic
cash dividends. Business objectives, operations, and expansion of operations are
funded through net cash flows from operations rather than incurring long-term
debt.

Working Capital

Working capital represents total current assets less total current liabilities.
At June 30, 2019 and December 31, 2018, our working capital was $11.5 million
and $8.8 million, respectively.

Net Cash Flows


Our net consolidated cash flows consisted of the following, for the three months
ended June 30 (in millions):
Provided by/(Used in):   2019       2018
Operating activities   $  3.8$  1.7
Investing activities   $ (0.7 )$ (1.0 )
Financing activities   $ (1.3 )$ (8.3 )



Operating Activities

Cash provided by operating activities was $3.8 million for the six months ended
June 30, 2019, compared to cash provided by operating activities of $1.7 million
for the same period in 2018. During the six months ended June 30, 2019, the
source of cash was income from operations. During the six months ended June 30,
2018, we purchased inventory and collected cash from our income tax receivable.


Investing Activities

For the six months ended June 30, 2019 and 2018, we invested cash of $0.7
million and $1.0 million, respectively. During the six months ended June 30,
2019, we invested approximately $0.5 million in back-office software projects
and approximately $0.2 million in leasehold improvements. During the six months
ended June 30, 2018, we invested approximately $0.4 million in back-office
software projects, approximately $0.3 million in leasehold improvements and $0.3
million in furniture and equipment.

Financing Activities


For the six months ended June 30, 2019 and 2018, our financing activities used
cash of $1.3 million and $8.3 million, respectively. For the six months ended
June 30, 2019, we used $0.7 million in the repayment of financing and lease
obligations and $0.6 million in payments of dividends to shareholders. For the
six months ended June 30, 2018, we used $6.8 million in the repurchase of our
company stock, $0.7 million in the repayment of financing and lease obligations
and $0.7 million in payments of dividends to shareholders.


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General Liquidity and Cash Flows

Short Term Liquidity


We believe our existing liquidity and cash flows from operations are adequate to
fund our normal expected future business operations and possible international
expansion costs for the next 12 months. As our primary source of liquidity is
our cash flow from operations, this will be dependent on our ability to maintain
and increase revenue and/or continue to reduce operational expenses. However, if
our existing capital resources or cash flows become insufficient to meet current
business plans, projections, and existing capital requirements, we may be
required to raise additional funds, which may not be available on favorable
terms, if at all.

We are engaged in ongoing audits in various tax jurisdictions and other disputes
in the normal course of business. It is impossible at this time to predict
whether we will incur any liability, or to estimate the ranges of damages, if
any, in connection with these matters. Adverse outcomes on these uncertainties
may lead to substantial liability or enforcement actions that could adversely
affect our cash position. For more information, see Note 3, Income Taxes, and
Note 7, Litigation, to our consolidated financial statements.

Long Term Liquidity


We believe our cash flows from operations should be adequate to fund our normal
expected future business operations. As our primary source of liquidity is from
our cash flows from operations, this will be dependent on our ability to
maintain or improve revenue as compared to operational expenses.

However, if our existing capital resources or cash flows become insufficient to
meet anticipated business plans and existing capital requirements, we may be
required to raise additional funds, which may not be available on favorable
terms, if at all.

Our future access to the capital markets may be adversely impacted if we fail to
maintain compliance with the Nasdaq Marketplace Rules for the continued listing
of our stock. We continuously monitor our compliance with the Nasdaq continued
listing rules.


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CONTRACTUAL OBLIGATIONS


The following summarizes our future commitments and obligations associated with
various agreements and contracts as of June 30, 2019, for the years ending
December 31 (in thousands):
Commitments and
obligations       Remaining 2019       2020        2021        2022       2023      2024     Thereafter       Less: Interest          Total
Finance lease
obligations     $             63     $    91$    83$   60$   34$  10   $          -     $             40        $    301
Purchase
obligations
(1)(2)                     2,581       5,100           -          -          -         -              -                                7,681
Operating lease
obligations (3)            1,149       1,406         820        660        606       613          2,139                1,230   (6)     6,163
Note payable
and other
financing
arrangements                 540         627         370          -          -         -              -                                1,537
Employment
agreements                   220         220           -          -          -         -              -                                  440
Royalty
agreement                     29          59           7          -          -         -              -                                   95
Tax liability
(4)                            -           -           -          -          -         -            184                                  184
Other
obligations (5)              327          88          28         26         60         -            659                                1,188
Total
commitments and
obligations     $          4,909     $ 7,591$ 1,308$  746$  700$ 623$      2,982     $          1,270        $ 17,589



(1)For purposes of the table, a purchase obligation is defined as an agreement
to purchase goods or services that is non-cancelable, enforceable and legally
binding on the Company that specifies all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction.
(2)Excludes approximately $14.2 million of finished product purchase orders that
may be canceled or with delivery dates that have changed as of June 30, 2019.
(3)Represents the minimum future payments, including imputed interest, for
operating leases under the scope of ASC Topic 842. Of the total present value of
lease liabilities, $1.6 million was recorded in "Accrued expenses" and $4.6
million was recorded in "Other long-term liabilities".
(4)Represents the tax liability associated with uncertain tax positions, see
Note 3, Income Taxes, to our Consolidated Financial Statements.
(5)Other obligations are composed of pension obligations related to the
Company's international operations (approximately $0.8 million) and lease
restoration obligations (approximately $0.4 million).
(6) Calculated using the estimated or stated interest rate for each lease.

We have maintained purchase commitments with certain raw material suppliers to
purchase minimum quantities and to ensure exclusivity of our raw materials and
the proprietary nature of our products. Currently, we have one supply agreement
that requires minimum purchase commitments. We also maintain other supply
agreements and manufacturing agreements to protect our products, regulate
product costs, and help ensure quality control standards. These other agreements
do not require us to purchase any set minimums. We have no present commitments
or agreements with respect to acquisitions or purchases of any manufacturing
facilities; however, management from time to time explores the possible benefits
of purchasing a raw material manufacturing facility to help control costs of our
raw materials and help ensure quality control standards.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Our consolidated financial statements are prepared in accordance with GAAP. The
application of GAAP requires us to make estimates and assumptions that affect
the reported values of assets and liabilities at the date of our financial
statements, the reported amounts of revenues and expenses during the reporting
period, and the related disclosures of contingent assets and liabilities. We use
estimates throughout our financial statements, which are influenced by
management's judgment and uncertainties. Our estimates are based on historical
trends, industry standards, and various other assumptions that we believe are
applicable and reasonable under the circumstances at the time the consolidated
financial statements are prepared. Our Audit Committee reviews our critical
accounting policies and estimates. We continually evaluate and review our
policies related to the portrayal of our consolidated financial position and
consolidated results of operations that require the application of significant
judgment by our management. We also analyze the need for certain estimates,
including the need for such items as allowance for doubtful accounts, inventory
reserves, long-lived fixed assets and capitalization of internal-use software
development costs, reserve for uncertain income tax positions and tax valuation
allowances, revenue recognition, sales returns, and deferred revenues,
accounting for stock-based compensation, and contingencies and litigation.
Historically, actual results have not materially deviated from our estimates.
However, we caution readers that actual results could differ from our estimates
and assumptions applied in the preparation of our consolidated financial
statements. If circumstances change relating to the various assumptions or
conditions used in our estimates, we could experience an adverse effect on our
financial position, results of operations, and cash flows. We have identified
the following applicable critical accounting policies and estimates as of
June 30, 2019.

Inventory Reserves


Inventory consists 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. We record the amounts charged by the vendors as the
costs of inventory. Typically, the net realizable value of our inventory is
higher than the aggregate cost. Determination of net realizable value can be
complex and, therefore, requires a high degree of judgment. In order for
management to make the appropriate determination of net realizable value, the
following items are considered: inventory turnover statistics, current selling
prices, seasonality factors, consumer demand, regulatory changes, competitive
pricing, and performance of similar products. If we determine the carrying value
of inventory is in excess of estimated net realizable value, we write down the
value of inventory to the estimated net realizable value.

We also review inventory for obsolescence in a similar manner and any inventory
identified as obsolete is reserved or written off. Our determination of
obsolescence is based on assumptions about the demand for our products, product
expiration dates, estimated future sales, and general future plans. We monitor
actual sales compared to original projections, and if actual sales are less
favorable than those originally projected by us, we record an additional
inventory reserve or write-down. Historically, our estimates have been close to
our actual reported amounts. However, if our estimates regarding inventory
obsolescence are inaccurate or consumer demand for our products changes in an
unforeseen manner, we may be exposed to additional material losses or gains in
excess of our established estimated inventory reserves.

Long Lived Fixed Assets and Capitalization of Software Development Costs


In addition to capitalizing long lived fixed asset costs, we also capitalize
costs associated with internally-developed software projects (collectively
"fixed assets") and amortize such costs over the estimated useful lives of such
fixed assets. Fixed assets are carried at cost, less accumulated depreciation
computed using the straight-line method over the assets' estimated useful lives.
Leasehold improvements are amortized over the shorter of the remaining lease
terms or the estimated useful lives of the improvements. Expenditures for
maintenance and repairs are charged to operations as incurred. If a fixed asset
is sold or otherwise retired or disposed of, the cost of the fixed asset and the
related accumulated depreciation or amortization is written off and any
resulting gain or loss is recorded in other operating costs in our consolidated
statement of operations.

We review our fixed assets for impairment whenever an event or change in
circumstances indicates the carrying amount of an asset or group of assets may
not be recoverable, such as plans to dispose of an asset before the end of its
previously estimated useful life. Our 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
exceeds the fair value. The fair value is determined by calculating the
discounted expected future cash flows using an estimated risk-free rate of
interest. Any identified impairment losses are recorded in the period in which
the impairment occurs. The carrying value of the fixed asset is adjusted to the
new carrying value, and any subsequent increases in fair value of the fixed
asset are not recorded. In addition, if we determine the estimated remaining
useful life of the asset should be reduced from our original estimate, the
periodic depreciation expense is adjusted prospectively, based on the new
remaining useful life of the fixed asset.


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The impairment calculation requires us to apply judgment and estimates
concerning future cash flows, strategic plans, useful lives, and discount rates.
If actual results are not consistent with our estimates and assumptions, we may
be exposed to an additional impairment charge, which could be material to our
results of operations. In addition, if accounting standards change, or if fixed
assets become obsolete, we may be required to write off any unamortized costs of
fixed assets, or if estimated useful lives change, we would be required to
accelerate depreciation or amortization periods and recognize additional
depreciation expense in our consolidated statement of operations.

Historically, our estimates and assumptions related to the carrying value and
the estimated useful lives of our fixed assets have not materially deviated from
actual results. As of June 30, 2019, the estimated useful lives and net carrying
values of fixed assets were as follows:
                                                                    Net carrying
                                                    Estimated         value at
                                                   useful life      June 30, 2019
Office furniture and equipment                     5 to 7 years     $0.8

million

Computer hardware and software                     3 to 5 years      3.3 million
Automobiles                                        3 to 5 years      0.1 million
Leasehold improvements (1)                        2 to 10 years      1.8 million
Total                                                               $6.0 million


(1) We amortize leasehold improvements over the shorter of the useful estimated
life of the leased asset or the lease term.
The net carrying costs of fixed assets are exposed to impairment losses if our
assumptions and estimates of their carrying values change, there is a change in
estimated future cash flow, or there is a change in the estimated useful life of
the fixed asset. Based on management's analysis, no impairment indicators
existed for the six months ended June 30, 2019 and the year ended December 31,
2018.

Uncertain Income Tax Positions and Tax Valuation Allowances


As of June 30, 2019, we recorded $0.2 million in other long-term liabilities on
our consolidated balance sheet related to uncertain income tax positions. As
required by Topic 740, we use judgments and make estimates and assumptions
related to evaluating the probability of uncertain income tax positions. We base
our estimates and assumptions on the potential liability related to an
assessment of whether the income tax position will "more likely than not" be
sustained in an income tax audit. We are also subject to periodic audits from
multiple domestic and foreign tax authorities related to income tax and other
forms of taxation. These audits examine our tax positions, timing of income and
deductions, and allocation procedures across multiple jurisdictions. Depending
on the nature of the tax issue, we could be subject to audit over several years.
Therefore, our estimated reserve balances and liability related to uncertain
income tax positions may exist for multiple years before the applicable statute
of limitations expires or before an issue is resolved by the taxing authority.
Additionally, we may be requested to extend the statute of limitations for tax
years under audit. It is reasonably possible the tax jurisdiction may request
that the statute of limitations be extended, which may cause the classification
between current and long-term to change. We believe our tax liabilities related
to uncertain tax positions are based upon reasonable judgment and estimates;
however, if actual results materially differ, our effective income tax rate and
cash flows could be affected in the period of discovery or resolution. There are
ongoing income tax audits in various international jurisdictions that we believe
are not material to our financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting
Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity
to elect to reclassify the stranded tax effects related to the TCJA from
accumulated other comprehensive income into retained earnings. ASU 2018-02 is
effective for fiscal years beginning after December 15, 2018, with early
adoption permitted. Adoption of this standard did not have a material effect on
our Consolidated Financial Statements.

Revenue Recognition and Deferred Commissions


Our revenue is derived from sales of individual products, sales of starter and
renewal packs, associate fees and shipping fees. Substantially all of our
product and pack sales are to associates and preferred customers at published
wholesale prices. We record revenue net of any sales taxes and record a reserve
for expected sales returns based on historical experience. We recognize revenue
from shipped packs and products upon receipt by the customer.
Corporate-sponsored event revenue is recognized when the event is held.

Revenues from associate fees relate to providing associates with the rights to
earn commissions, benefits and incentives for an annual period. Associate fees
are recognized evenly over the course of the annual period of the associate's
contract. We collected associate fees within the United States, Canada, South
Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, Taiwan, Austria,
the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland,
the Netherlands, Norway, Spain, and the United Kingdom during the three and six
months ended June 30, 2019.

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The arrangement regarding associate fees has three service elements: (1)
providing new associates with the eligibility to earn commissions, benefits and
incentives for twelve months, (2) three months of complimentary access to
utilize the Success Tracker™ online tool, and (3) three months of complimentary
access to utilize the Mannatech+ customized electronic business-building tool.
Each of these service elements is provided over time to the customer. For the
three and six months ended June 30, 2019, the associate fees were allocated to
these three service elements on a relative standalone selling price basis in
accordance with ASC 606.

We defer certain components of revenue. At June 30, 2019 and December 31, 2018,
deferred revenue was $5.8 million and $5.3 million, respectively. When
participating in our loyalty program, customers earn loyalty points from
qualified automatic orders that can be applied to future purchases. We defer 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 June 30, 2019 and
December 31, 2018 was $3.5 million and $4.2 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, we defer
commissions on (i) the sales of packs and products ordered but not received by
the customers by the end of the respective period and (ii) the loyalty program.
Deferred commissions were $2.7 million and $2.4 million at June 30, 2019 and
December 31, 2018, respectively.

Loyalty program                                    (in thousands)

Loyalty deferred revenue as of January 1, 2018 $ 6,406 Loyalty points forfeited or expired

                        (4,332 )
Loyalty points used                                       (11,398 )
Loyalty points vested                                      12,469
Loyalty points unvested                                     1,086

Loyalty deferred revenue as of December 31, 2018 $ 4,231

Loyalty deferred revenue as of January 1, 2019$ 4,231 Loyalty points forfeited or expired

             (2,581 )
Loyalty points used                             (4,493 )
Loyalty points vested                            5,179
Loyalty points unvested                          1,147

Loyalty deferred revenue as of June 30, 2019$ 3,483

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Product Return Policy

We stand behind our packs and products and believe we offer a reasonable and
industry-standard product return policy to all of our customers. We do not
resell returned products. Refunds are not processed until proper approval is
obtained. All refunds must be processed and returned in the same form of payment
that was originally used in the sale. Each country in which we operate has
specific product return guidelines. However, we allow our associates and
preferred customers to exchange products as long as the products are unopened
and in good condition. Our return policies for our retail customers and our
associates and preferred customers are as follows:
•       Retail Customer Product Return Policy. This policy allows a retail

customer to return any of our products to the original associate who sold

        the product and receive a full cash refund from the associate for the
        first 180 days following the product's purchase if located in the United

States and Canada, and for the first 90 days following the product's

purchase in other countries where we sell our products. The associate

may then return or exchange the product based on the associate product

return policy.

• Associate and Preferred Customer Product Return Policy. This policy

allows the associate or preferred customer to return an order within one

        year of the purchase date upon terminating his/her account. If an
        associate or preferred customer returns a product unopened and in good
        condition, he/she may receive a full refund minus a 10% restocking fee.
        We may also allow the associate or preferred customer to receive a full

satisfaction guarantee refund if they have tried the product and are not

satisfied for any reason, excluding promotional materials. This

satisfaction guarantee refund applies in the United States and Canada,

only for the first 180 days following the product's purchase, and applies

        in other countries where we sell our products for the first 90 days
        following the product's purchase; however, any commissions earned by an
        associate will be deducted from the refund. If we discover abuse of the

refund policy, we may terminate the associate's or preferred customer's

account.



Historically, sales returns estimates have not materially deviated from actual
sales returns, as the majority of our customers who return merchandise do so
within the first 90 days after the original sale. Based upon our return policies
and historical experience, we estimate a sales return reserve for expected sales
refunds over a rolling six-month period. If actual results differ from our
estimated sales returns reserves 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 and have averaged 1.5% or
less of our gross sales.

Accounting for Stock-Based Compensation


We grant stock options to our employees, board members, and consultants. At the
date of grant, we determine the fair value of a stock option award and recognize
compensation expense over the requisite service period, or the vesting period of
such stock option award, which is two or three years. The fair value of the
stock option award is calculated using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model requires us to apply judgment and use
highly subjective assumptions, including expected stock option life, expected
volatility, expected average risk-free interest rates, and expected forfeiture
rates.

                                                          June 2019 Grant
Estimated fair value per share of options granted:             $3.72

Assumptions:

  Annualized dividend yield                                    7.5%
  Risk-free rate of return                                     1.9%
  Common stock price volatility                                47.6%
  Expected average life of stock options (in years)             4.5





The assumptions we use are based on our best estimates and involve inherent
uncertainties related to market conditions that are outside of our control. If
actual results are not consistent with the assumptions we use, the stock-based
compensation expense reported in our consolidated financial statements may not
be representative of the actual economic cost of stock-based compensation. For
example, if actual employee forfeitures significantly differ from our estimated
forfeitures, we may be required to make an adjustment to our consolidated
financial statements in future periods.


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If we grant additional stock options in the future, we would be required to
recognize additional compensation expense over the vesting period of such stock
options in our consolidated statement of operations. As of June 30, 2019, we had
157,434 shares available for grant in the future. During the three months ended
June 30, 2019, the Company granted 15,000 stock options.

Contingencies and Litigation


Each quarter, we evaluate the need to establish a reserve for any legal claims
or assessments. We base our evaluation on our best estimates of the potential
liability in such matters. The legal reserve includes an estimated amount for
any damages and the probability of losing any threatened legal claims or
assessments. We consult with our general and outside counsel to determine the
legal reserve, which is based upon a combination of litigation and settlement
strategies. Although we believe that our legal reserve and accruals are based on
reasonable judgments and estimates, actual results could differ, which may
expose us to material gains or losses in future periods. If actual results
differ, if circumstances change, or if we experience an unanticipated adverse
outcome of any legal action, including any claim or assessment, we would be
required to recognize the estimated amount which could reduce net income,
earnings per share, and cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU
2016-13"). This standard adds to GAAP an impairment model (known as the current
expected credit loss ("CECL") model) that is based on expected losses rather
than incurred losses. Under the new guidance, an entity recognizes as an
allowance its estimate of expected credit losses, which is intended to result in
the more timely recognition of losses. Under the CECL model, entities will
estimate credit losses over the entire contractual term of the instrument
(considering estimated prepayments, but not expected extensions or
modifications) from the date of initial recognition of the financial instrument.
Measurement of expected credit losses are to be based on relevant forecasts that
affect collectability. The scope of financial assets within the CECL methodology
is broad and includes trade receivables from certain revenue transactions and
certain off-balance sheet credit exposures. Different components of the guidance
require modified retrospective or prospective adoption. ASU 2016-13 will be
effective for us as of January 1, 2020. While our review is ongoing, we believe
ASU 2016-13 will only have applicability to our receivables from revenue
transactions. Under ASC 606, revenue is recognized when, among other criteria,
it is probable that the entity will collect the consideration to which it is
entitled for goods or services transferred to a customer. At the point that
trade receivables are recorded, they become subject to the CECL model and
estimates of expected credit losses on trade receivables over their contractual
life will be required to be recorded at inception based on historical
information, current conditions, and reasonable and supportable forecasts. The
Company is currently evaluating whether the new guidance will have an impact on
our consolidated financial statements or existing internal controls.

See Note 1 to our Consolidated Financial Statements for further information on recent accounting pronouncements.

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