MANNATECH, INCORPORATED 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 endedSeptember 30, 2021 as compared to the same period in 2020, and should be read in conjunction with Item 1 "Financial Statements" in Part I of this quarterly report on Form 10-Q and Item 1A "Risk Factors" in Part I of our 2020 Annual Report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includesMannatech 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
The Company is a global wellness solution provider, which was incorporated and began operations inNovember 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) theAmericas (the United States ,Canada andMexico ); (ii)Europe /theMiddle East /Africa ("EMEA") (Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,Namibia ,the Netherlands ,Norway ,South Africa ,Spain ,Sweden and theUnited Kingdom ); and (iii)Asia/Pacific (Australia ,Japan ,New Zealand , theRepublic of Korea ,Singapore ,Taiwan ,Hong Kong , andChina ). We conduct our business as a single operating segment and primarily sell our products through a network of approximately 166,000 active associates and preferred customer positions held by individuals that 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 24 countries and direct e-commerce retail inChina . 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 inChina , Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business inChina unless it acquires a direct selling license inChina .
The Company maintains a corporate website at www.mannatech.com.
Current Economic Conditions and Recent Developments
Overall net sales increased$1.4 million , or 3.9%, to$39.4 million , during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. Net sales for the nine months endedSeptember 30, 2021 increased by$8.1 million , or 7.2%, to$120.3 million , as compared to the same period in 2020. For the three and nine months endedSeptember 30, 2021 , our net sales increased 1.3% and 2.9%, respectively, on a Constant dollar basis (see Non-GAAP Measures, below); favorable foreign exchange during the three and nine months endedSeptember 30, 2021 caused a$0.9 million and a$4.9 million increase, respectively, in GAAP net sales, as compared to the same period in 2020. For the three and nine months endedSeptember 30, 2021 , our operations outside of theAmericas accounted for approximately 71.6% and 71.3%, respectively, of our consolidated net sales. Excluding the effects due to the translation of foreign currencies intoU.S. dollars, net sales would have increased$0.5 million and$3.2 million , respectively, for the three and nine months endedSeptember 30, 2021 compared to the same period in 2020. These adjusted net sales expressed in Constant dollars are a non-GAAP financial measure discussed in further detail below. 23
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RESULTS OF OPERATIONS
Three Months Ended
The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): 2021 2020 Change from 2020 to 2021 Total % of Total % of Dollar Percentage dollars net sales dollars net sales Net sales$ 39,446 100.0 %$ 37,966 100.0 %$ 1,480 3.9 % Cost of sales 7,903 20.0 % 9,328 24.6 % (1,425) (15.3) % Gross profit 31,543 80.0 % 28,638 75.4 % 2,905 10.1 % Operating expenses: Commissions and incentives 15,731 39.9 % 15,089 39.7 % 642 4.3 % Selling and administrative expenses 7,156 18.1 % 6,639 17.5 % 517 7.8 % Depreciation and amortization expense 408 1.0 % 468 1.2 % (60) (12.8) % Other operating costs 4,962 12.6 % 5,062 13.3 % (100) (2.0) % Total operating expenses 28,257 71.6 % 27,258 71.8 % 999 3.7 % Income from operations 3,286 8.3 % 1,380 3.6 % 1,906 138.1 % Interest income 15 - % 10 - % 5 50.0 % Other (expense) income, net (19) - % 248 0.7 % (267) (107.7) % Income before income taxes 3,282 8.3 % 1,638 4.3 % 1,644
100.4 %
Income tax (provision) (352) (0.9) %
(22) (0.1) % (330) 1,500.0 %
Net income $ 2,930 7.4 % $ 1,616 4.3 % $ 1,314 81.3 %
Nine Months Ended
The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): 2021 2020 Change from 2020 to 2021 Total % of Total % of Dollar Percentage dollars net sales dollars net sales Net sales$ 120,269 100.0 %$ 112,218 100.0 %$ 8,051 7.2 % Cost of sales 25,251 21.0 % 25,044 22.3 % 207 0.8 % Gross profit 95,018 79.0 % 87,174 77.7 % 7,844 9.0 % Operating expenses: Commissions and incentives 48,227 40.1 % 45,308 40.4 % 2,919 6.4 % Selling and administrative expenses 21,838 18.2 % 20,659 18.4 % 1,179 5.7 % Depreciation and amortization expense 1,360 1.1 % 1,525 1.4 % (165) (10.8) % Other operating costs 15,500 12.9 % 15,180 13.5 % 320 2.1 % Total operating expenses 86,925 72.3 % 82,672 73.7 % 4,253 5.1 % Income from operations 8,093 6.7 % 4,502 4.0 % 3,591 79.8 % Interest income 44 - % 73 0.1 % (29) (39.7) % Other (expense) income, net (149) (0.1) % 206 0.2 % (355) (172.3) % Income before income taxes 7,988 6.6 % 4,781 4.3 % 3,207 67.1 % Income tax (provision) benefit (735) (0.6) % 753 0.7 % (1,488) (197.6) % Net income$ 7,253 6.0 %$ 5,534 4.9 %$ 1,719 31.1 % 24
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Table of Contents Non-GAAP Financial Measures To supplement our financial results presented in accordance with GAAP, we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies intoU.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 intoU.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 September 30, percentages) September 30, 2021 2020 Constant $ Change GAAP Non-GAAP GAAP Measure: Measure: Measure: Total $ Constant $ Total $ Dollar Percent Net sales$ 39.4 $ 38.5 $ 38.0 $ 0.5 1.3 % Product 36.9 36.1 35.7 0.4 1.1 % Pack sales and associate fees 2.4 2.3 2.0 0.3 15.0 % Other 0.1 0.1 0.3 (0.2) (66.7) % Gross profit 31.5 30.8 28.6 2.2 7.7 % Income from operations 3.3 3.1 1.4 1.7 121.4 % Nine-month period ended (in millions, except September 30, percentages) September 30, 2021 2020 Constant $ Change GAAP Non-GAAP GAAP Measure: Measure: Measure: Total $ Constant $ Total $ Dollar Percent Net Sales$ 120.3 $ 115.4 $ 112.2 $ 3.2 2.9 % Product 113.2 108.7 108.7 - - % Pack sales and associate fees 6.5 6.1 2.8 3.3 117.9 % Other 0.6 0.5 0.7 (0.2) (28.6) % Gross Profit 95.0 91.2 87.2 4.0 4.6 % Income from Operations 8.1 7.0 4.5 2.5 55.6 % Net Sales Consolidated net sales for the three months endedSeptember 30, 2021 increased by$1.4 million , or 3.9%, to$39.4 million as compared to$38.0 million for the same period in 2020. Consolidated net sales for the nine months endedSeptember 30, 2021 increased by$8.1 million , or 7.2%, to$120.3 million as compared to$112.2 million for the same period in 2020.
Consolidated net sales by region for the three months ended
Three Months Ended Three Months Ended
Region September 30, 2021 September 30, 2020
Americas $ 11.2 28.4 % $ 11.4 30.0 %
Asia/Pacific 24.2 61.4 % 23.0 60.5 %
EMEA 4.0 10.2 % 3.6 9.5 %
Total $ 39.4 100.0 % $ 38.0 100.0 %
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Consolidated net sales by region for the nine months ended
Nine Months Ended Nine Months Ended
Region September 30, 2021 September 30, 2020
Americas $ 34.5 28.7 % $ 34.1 30.4 %
Asia/Pacific 74.0 61.5 % 67.9 60.5 %
EMEA 11.8 9.8 % 10.2 9.1 %
Total $ 120.3 100.0 % $ 112.2 100.0 %
For the three months ended September 30, 2021 , net sales in the Americas
decreased by $0.2 million , or 1.8%, to $11.2 million , as compared to $11.4
million for the same period in 2020. This decrease was primarily due to a 3.0%
decrease in the number of active independent associates and preferred customers,
which was partially offset by a 1.3% increase in revenue per active independent
associate and preferred customer. Foreign currency had the effect of increasing
revenue by $0.1 million for the three months ended September 30, 2021 , as
compared to the same period in 2020. The currency impact is due to the
strengthening of the Mexican Peso.
For the nine months ended September 30, 2021 , net sales in the Americas
increased by $0.4 million , or 1.2%, to $34.5 million , as compared to $34.1
million for the same period in 2020. This increase was primarily due to a 4.3%
increase in revenue per active independent associate and preferred customer and
a 3.9% increase in the number of active independent associates and preferred
customers. Foreign currency had the effect of increasing revenue by $0.2 million
for the nine months ended September 30, 2021 , as compared to the same period in
2020. The currency impact is due to the strengthening of the Mexican Peso.
For the three months ended
For the nine months ended
For the three months endedSeptember 30, 2021 ,Asia/Pacific net sales increased by$1.2 million , or 5.2%, to$24.2 million , as compared to$23.0 million for the same period in 2020. This increase was primarily due to a 20.9% increase in revenue per active independent associate and preferred customer, which was partially offset by a 12.9% decrease in the number of active independent associates and preferred customer. Foreign currency exchange had the effect of increasing revenue by$0.4 million for the three months endedSeptember 30, 2021 , as compared to the same period in 2020. The currency impact is primarily due to the strengthening of the Korean Won, Australian Dollar, Chinese Yuan (Renminbi), New Zealand Dollar, Taiwanese Dollar and the Singapore Dollar, which was partially offset by the weakening of the Japanese Yen and theHong Kong Dollar. For the nine months endedSeptember 30, 2021 ,Asia/Pacific net sales increased by$6.1 million , or 9.0%, to$74.0 million , as compared to$67.9 million for the same period in 2020. This increase was primarily due to a 25.2% increase in revenue per active independent associate and preferred customer, which was partially offset by a 1.7% decrease in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by$3.4 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. The currency impact is primarily due to the strengthening of the Korean Won, Australian Dollar, Chinese Yuan (Renminbi), New Zealand Dollar, Taiwanese Dollar and the Singapore Dollar, which was partially offset by the weakening of the Japanese Yen and the Hong Kong Dollar . For the three months endedSeptember 30, 2021 , EMEA net sales increased by$0.4 million , or 11.1%, to$4.0 million , as compared to$3.6 million for the same period in 2020. The increase was primarily due to a 15.4% increase in revenue per active independent associate and preferred customer, which was partially offset by a 3.7% decrease in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by$0.4 million for the three-month period endingSeptember 30, 2021 as compared to the same period in 2020. The currency impact is primarily due to the strengthening of the South African Rand, British Pound and the Euro. 26 -------------------------------------------------------------------------------- Table of Contents For the nine months endedSeptember 30, 2021 , EMEA net sales increased by$1.6 million , or 15.7%, to$11.8 million , as compared to$10.2 million for the same period in 2020. The increase was primarily due to a 20.2% increase in revenue per active independent associate and preferred customer and a 17.2% increase in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by$1.3 million for the nine-month period endingSeptember 30, 2021 as compared to the same period in 2020. The currency impact is primarily due to the strengthening of the South African Rand, British Pound and the Euro. Our total sales and sales mix could be influenced by any of the following: •the impact of the COVID-19 pandemic, the availability and effectiveness of vaccines on a widespread basis and the impact of any mutations of the virus; •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 nine months ended
Three Months Ended
September 30, Change
2021 2020 Dollar Percentage
Consolidated product sales $ 36.9 $ 35.7 $ 1.2 3.4 %
Consolidated pack sales and associate fees 2.4 2.0 0.4 20.0 %
Consolidated other 0.1 0.3 (0.2) (66.7) %
Total consolidated net sales $ 39.4 $ 38.0 $ 1.4 3.7 %
Nine Months Ended
September 30, Change
2021 2020 Dollar Percentage
Consolidated product sales $ 113.2 $ 108.7 $ 4.5 4.1 %Consolidated pack sales and associate fees 6.5 2.8
3.7 132.1 % Consolidated other 0.6 0.7 (0.1) (14.3) % Total consolidated net sales$ 120.3 $ 112.2 $ 8.1 7.2 % Product Sales
Our product sales are made to our independent associates and preferred customers at published wholesale prices.
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Product sales for the three months endedSeptember 30, 2021 increased by$1.2 million , or 3.4%, as compared to the same period in 2020. The increase in product sales was primarily due to the increase in the average order value. The average order value for the three months endedSeptember 30, 2021 was$184 , as compared to$171 for the same period in 2020. The number of orders processed during the three months endedSeptember 30, 2021 decreased by 5.5%, to 208,234, as compared to 220,313 for the same period in 2020. Product sales for the nine months endedSeptember 30, 2021 increased by$4.5 million , or 4.1%, as compared to the same period in 2020. The increase in product sales was primarily due to the increase in the average order value. The average order value for the nine months endedSeptember 30, 2021 was$190 , as compared to$181 for the same period in 2020. The number of orders processed during the nine months endedSeptember 30, 2021 decreased by 1.1%, to 622,418, as compared to 629,650 for the same period in 2020. Pack Sales and Associate Fees The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year. The Company collected associate fees in lieu of pack sales withinthe United States ,Canada ,South Africa ,Japan ,Australia ,New Zealand ,Singapore ,Hong Kong ,Taiwan ,Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,the Netherlands ,Norway ,Spain ,Sweden and theUnited Kingdom . In theRepublic of Korea andMexico , packs may still be purchased by our associates who wish to build aMannatech business. These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. In certain of these markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials. We also do not collect associate fees or sell packs in our non-direct selling business in mainlandChina . The dollar amount of pack sales and associate fees associated with new and continuing independent associate positions held by individuals in our network was as follows for the three and nine months endedSeptember 30 , (in millions, except percentages): Three Months Ended September 30, Change 2021 2020 Dollar Percentage New$ 0.1 $ 0.2 $ (0.1) (50.0) % Continuing 2.3 1.8 0.5 27.8 % Total$ 2.4 $ 2.0 $ 0.4 20.0 % Nine Months Ended September 30, Change 2021 2020 Dollar Percentage New$ 0.4 $ 0.4 $ - - % Continuing 6.1 2.4 3.7 154.2 % Total$ 6.5 $ 2.8 $ 3.7 132.1 % Total pack sales and associate fees for the three months endedSeptember 30, 2021 increased by$0.4 million , or 20.0%, to$2.4 million , as compared to$2.0 million for the same period in 2020. Average pack and associate fee value for the three months endedSeptember 30, 2021 was$87 , as compared to$69 for the same period in 2020. The total number of packs and associate fees sold decreased by 796, or 2.8%, to 27,349 for the three months endedSeptember 30, 2021 , as compared to the same period in 2020. Total pack sales and associate fees for the nine months endedSeptember 30, 2021 increased by$3.7 million , or 132.1%, to$6.5 million , as compared to$2.8 million for the same period in 2020. Average pack and associate fee value for the nine months endedSeptember 30, 2021 was$89 , as compared to$40 for the same period in 2020. The total number of packs and associate fees sold increased by 3,129, or 4.5%, to 73,332 for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020. 28
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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 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 2020 and continuing into 2021, 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 endedSeptember 30, 2021 and 2020 were as follows: 2021 2020 New 86,000 51.8 % 81,000 45.0 % Continuing 80,000 48.2 % 99,000 55.0 % Total 166,000 100.0 % 180,000 100.0 % Recruitment of new independent associates and preferred customers decreased by 1.4% to 25,036 in the third quarter of 2021 from 25,388 in the third quarter of 2020. Other Sales Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications; (iii) training and event registration fees; and (iv) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools support our independent associates, which in turn helps stimulate product sales.
For the three months ended
For the nine months ended
Gross Profit
For the three months endedSeptember 30, 2021 , gross profit increased by$2.9 million , or 10.1%, to$31.5 million , as compared to$28.6 million for the same period in 2020. For the three months endedSeptember 30, 2021 , gross profit as a percentage of net sales increased to 80.0%, as compared to 75.4% for the same period in 2020 due to price increases in key markets and the strengthening of the Korean Won and South African Rand. For the nine months endedSeptember 30, 2021 , gross profit increased by$7.8 million , or 9.0%, to$95.0 million , as compared to$87.2 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , gross profit as a percentage of net sales increased to 79.0%, as compared to 77.7% for the same period in 2020 due to price increases in key markets and the strengthening of the Korean Won and South African Rand.
Commissions and Incentives
Commission expenses for the three months endedSeptember 30, 2021 increased by 5.0%, or$0.7 million , to$15.2 million , as compared to$14.5 million for the same period in 2020. For the three months endedSeptember 30, 2021 , commissions as a percentage of net sales increased to 38.5% from 38.1% for the same period in 2020. 29 -------------------------------------------------------------------------------- Table of Contents Commission expenses for the nine months endedSeptember 30, 2021 increased by 6.9%, or$3.0 million , to$46.4 million , as compared to$43.4 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , commissions as a percentage of net sales decreased to 38.6% from 38.7% for the same period in 2020. Incentive costs for the three months endedSeptember 30, 2021 decreased to$0.5 million , as compared to$0.6 million for the same period in 2020. For the three months endedSeptember 30, 2021 , incentives as a percentage of net sales decreased to 1.3% from 1.6% for the same period in 2020. Incentive costs for the nine months endedSeptember 30, 2021 decreased to$1.8 million , as compared to$1.9 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , incentives as a percentage of net sales decreased to 1.5% from 1.7% for the same period in 2020.
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 endedSeptember 30, 2021 , selling and administrative expenses increased by$0.5 million , or 7.8%, to$7.1 million , as compared to$6.6 million for the same period in 2020. The increase in selling and administrative expenses consisted of a$0.9 million increase in payroll costs, which was partially offset by a$0.3 million decrease in marketing costs and a$0.1 million decrease in contract labor. Selling and administrative expenses, as a percentage of net sales, for the three months endedSeptember 30, 2021 increased to 18.1% from 17.5% for the same period in 2020. For the nine months endedSeptember 30, 2021 , selling and administrative expenses increased by$1.1 million , or 5.7% to$21.8 million , as compared to$20.7 million for the same period in 2020. The increase in selling and administrative expenses consisted of a$1.5 million increase in payroll costs, which was partially offset by a$0.2 million decrease in marketing costs and a$0.2 million decrease in contract labor. Selling and administrative expenses, as a percentage of net sales, for the nine months endedSeptember 30, 2021 decreased to 18.2% from 18.4% for the same period in 2020.
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.
For the three months endedSeptember 30, 2021 , other operating costs decreased by$0.1 million , or 2.0%, to$5.0 million , as compared to$5.1 million for the same period in 2020. For the three months endedSeptember 30, 2021 , other operating costs as a percentage of net sales decreased to 12.6% from 13.3% for the same period in 2020. The decrease in operating costs was primarily due to a$0.3 million increase in consulting fees, which was offset by a$0.2 million decrease in bad debt expense and a$0.2 million decrease in sales tax expenses resulting from less utilization of the loyalty program and a sales tax audit refund. For the nine months endedSeptember 30, 2021 , other operating costs increased by$0.3 million , or 2.1%, to$15.5 million , as compared to$15.2 million for the same period in 2020. For the nine months endedSeptember 30, 2021 , other operating costs as a percentage of net sales decreased to 12.9% from 13.5% for the same period in 2020. The increase in operating costs was primarily due to a$0.5 million increase in consulting fees and a$0.2 million increase in credit card fees, which was partially offset by a$0.2 million decrease in bad debt expense, a$0.1 million decrease in travel and entertainment costs and a$0.1 million decrease in sales tax expenses resulting from less utilization of the loyalty program and a sales tax audit refund.
Depreciation and Amortization Expense
Depreciation and amortization expense was
Depreciation and amortization expense was
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Other Income (Expense), Net
Due to foreign exchange gains and losses, other expense was
Due to foreign exchange gains and losses, other expense was$0.1 million for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2020 , other income was$0.2 million .
Income Tax (Provision) Benefit
(Provision) benefit for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the three and nine months endedSeptember 30 : Country 2021 2020 Australia 30.0 % 30.0 % Canada 26.5 % 26.5 % China(1) 5.0 % 5.0 % Colombia(2) 31.0 % 33.0 % Cyprus 12.5 % 12.5 % Denmark 22.0 % 22.0 % Gibraltar(3) 11.3 % 10.0 % Hong Kong 16.5 % 16.5 % Japan 34.6 % 34.6 % Mexico 30.0 % 30.0 % Norway 22.0 % 23.0 % Republic of Korea 22.0 % 22.0 % Russia(4) 20.0 % 20.0 % Singapore 17.0 % 17.0 % South Africa 28.0 % 28.0 % Sweden 20.6 % 22.0 % Switzerland(5) 9.2 % 9.2 % Taiwan 20.0 % 20.0 % Ukraine(6) 18.0 % 18.0 % United Kingdom 19.0 % 17.0 % United States(7) 23.8 % 23.8 % (1)For 2020 and 2021, the Company qualifies for a reduced 5% tax rate inChina as a Small Low Profit Enterprise. (2)OnNovember 1, 2019 , the Company suspended operations inColombia , but maintains the legal entity, Mannatech Colombia SAS. (3)For 2021, the Company will pay taxes at 10% forGibraltar earnings untilAugust 1, 2021 , and 12.5% fromAugust 1,2021 onward. 11.3% is the effective rate that results from year to date and forecasted 2021 earnings. In 2022, the rate will be 12.5%. (4)OnAugust 1, 2016 , the Company established a legal entity inRussia calledMannatech RUS Ltd. , but currently does not operate inRussia . (5)OnJuly 1, 2019 , the Company suspended operations inSwitzerland , but maintains the legal entity,Mannatech Swiss International GmbH . (6)OnMarch 21, 2014 , the Company suspended operations in theUkraine , but maintains the legal entity,Mannatech Ukraine LLC . (7)Includes blended state effective rate of 2.8% in addition toU.S federal statutory rate of 21% 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 inthe United States , we may not be able to fully utilize our foreign income tax credits inthe 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. 31 -------------------------------------------------------------------------------- Table of Contents For the three and nine months endedSeptember 30, 2021 , the Company's effective tax rate was 10.7% and 9.2%, respectively. For the three and nine months endedSeptember 30, 2020 , the Company's effective tax rate was 1.3% and (15.8)%, respectively. For the three and nine months endedSeptember 30, 2021 and 2020, the Company's effective tax rate was determined based on the estimated annual effective income tax rate.
The effective tax rates for the three and nine months ended
The effective tax rate for the three months endedSeptember 30, 2020 was different from the federal statutory rate due primarily to the Company taking the IRC 250 deduction and applying foreign tax credits. . The effective tax rate for the nine months endedSeptember 30, 2020 was different from the federal statutory rate due primarily to the$1.2 million benefit recorded in connection with the carryback ofU.S. net operating losses, as allowed by the provisions of the CARES Act, enactedMarch 27, 2020 . 32 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
As ofSeptember 30, 2021 , our cash and cash equivalents increased by 22.2%, or$4.9 million , to$27.1 million from$22.2 million as ofDecember 31, 2020 . The Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in theRepublic of Korea ; (ii) reserve on credit card sales inthe United States andCanada ; and (iii) theAustralia building lease collateral. The current portion of restricted cash balances were$0.9 million at each ofSeptember 30, 2021 andDecember 31, 2020 . The long-term portion of restricted cash balances were$1.1 million and$4.0 million atSeptember 30, 2021 and 2020, respectively. Finally, fluctuations in currency rates produced a decrease of$2.5 million and$0.4 million in cash and cash equivalents for the nine months endedSeptember 30, 2021 and 2020, respectively. Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends. Business objectives, operations, and expansion of operations are funded through net cash flows from operations rather than incurring long-term debt. Working Capital
Working capital represents total current assets less total current liabilities.
At
Net Cash Flows
Our net consolidated cash flows consisted of the following, for the nine months endedSeptember 30 (in millions): Provided by/(Used in): 2021 2020 Operating activities$ 10.8 $ 3.3 Investing activities$ (0.5) $ (0.8) Financing activities$ (6.1) $ (6.9) Operating Activities Our primary source of cash is our profitable operations, which provided$10.8 million cash flow for the nine months endedSeptember 30, 2021 , compared to the$3.3 million of cash provided by operating activities for the same period in 2020. Investing Activities For the nine months endedSeptember 30, 2021 and 2020, we invested cash of$0.5 million and$0.8 million , respectively. During the nine months endedSeptember 30, 2021 , we invested approximately$0.4 million in back-office software projects and$0.1 million in leasehold improvements. During the nine months endedSeptember 30, 2020 , we invested approximately$0.6 million in back-office software projects,$0.1 million in office equipment and$0.1 million in leasehold improvements in various international offices and training centers.
Financing Activities
For the nine months endedSeptember 30, 2021 and 2020, our financing activities used cash of$6.1 million and$6.9 million , respectively. For the nine months endedSeptember 30, 2021 , we used$5.1 million in the repurchase of our company stock,$1.0 million in payments of dividends to shareholders, and$0.3 million in the repayment of finance lease obligations, which was partially offset by$0.3 million of cash provided by the exercise of stock options. For the nine months endedSeptember 30, 2020 , we used$5.6 million in the repurchase of our company stock,$0.4 million in the repayment of finance lease obligations and$0.9 million in payments of dividends to shareholders. 33
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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 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. The Company depends on an independent salesforce of distributors to market and sell its products to consumers. Social distancing and shelter-in-place directives in response to the COVID-19 pandemic have impacted and may continue to impact their ability to engage with potential and existing customers. The adverse economic effects of COVID-19 may also materially decrease demand for the Company's products based on changes in consumer behavior or the restrictions in place by governments trying to curb the outbreak. For example, the Company has rescheduled corporate sponsored events, and in some cases, our associates have canceled sales meetings. While the conditions described above are expected to be temporary, prolonged workforce disruptions, disruption in our supply chain or potential decreases in consumer demands may negatively impact sales in fiscal year 2021 and the Company's overall liquidity.
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.
34-------------------------------------------------------------------------------- Table of Contents CONTRACTUAL OBLIGATIONS The following summarizes our future commitments and obligations associated with various agreements and contracts as ofSeptember 30, 2021 , for the years endingDecember 31 (in thousands): Commitments and obligations Remaining 2021 2022 2023 2024 2025 Thereafter Total Finance lease obligations $ 24$ 74 $ 47 $ 21 $ 1 $ -$ 167 Purchase obligations (1)(2)(3) 1,300 2,617 - - - -
3,917
Operating lease obligations (6) (7) 589 1,730 1,167 1,251 868 1,528
7,133
Note payable and other financing arrangements 129 86 - - - - 215 Employment agreements 158 473 - - - - 631 Tax liability (4) - - - - - 209 209 Other obligations (5) 217 177 23 116 34 630 1,197
Total commitments and obligations
$ 1,237 $ 1,388 $ 903 $ 2,367 $ 13,469 (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$21.0 million of finished product purchase orders that may be canceled or with delivery dates that have changed as ofSeptember 30, 2021 . (3)Renewal term of one supply agreement with minimum purchase commitments was modified from a 2 year auto-renew to 1 year and extended untilNovember 2022 . (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$0.9 million ) and lease restoration obligations (approximately$0.3 million ). (6)Calculated using the rate implicit in each lease or an estimated rate. (7)Represents the minimum future payments, including imputed interest, for operating leases within the scope of Topic 842. Of the total present value of operating lease liabilities,$1.7 million was recorded in "Accrued expenses" and$4.6 million was recorded in "Other long-term liabilities". 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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SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL 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 significant accounting policies and critical 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 significant accounting policies and critical estimates as ofSeptember 30, 2021 . 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 ofSeptember 30, 2021 , the estimated useful lives and net carrying values of fixed assets were as follows: Net carrying value at Estimated useful life September 30, 2021 Office furniture and equipment 5 to 7 years$0.4 million Computer hardware and software 3 to 5 years 1.1 million Leasehold improvements (1) 2 to 10 years 1.3 million Automobiles 3 to 5 years 0.1 million Total (2)$2.9 million (1) We amortize leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term. (2) Property and Equipment is presented on the Balance Sheet as the sum of$2.9 million of fixed assets, shown in the table above, and$0.2 million of right of use assets related to financing leases, which are not shown in this table. See Note 8, Leases, for more information. 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 nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 .
Uncertain Income Tax Positions and Tax Valuation Allowances
As ofSeptember 30, 2021 , 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.
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 withinthe United States ,Canada ,South Africa ,Japan ,Australia ,New Zealand ,Singapore ,Hong Kong ,Taiwan ,Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,the Netherlands ,Norway ,Spain , and theUnited Kingdom during the three and nine months endedSeptember 30, 2021 . 37 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 2021 , 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. AtSeptember 30, 2021 andDecember 31, 2020 , deferred revenue was$5.8 million and$5.5 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 atSeptember 30, 2021 andDecember 31, 2020 was$4.2 million and$4.5 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$2.3 million at each ofSeptember 30, 2021 andDecember 31, 2020 . Loyalty program (in thousands)
Loyalty deferred revenue as of
(3,249)
Loyalty points used (9,385)
Loyalty points vested 12,771
Loyalty points unvested 1,223
Loyalty deferred revenue as of
Loyalty deferred revenue as of
(3,049)
Loyalty points used (7,239)
Loyalty points vested 8,783
Loyalty points unvested 1,261
Loyalty deferred revenue as of
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 inthe United States andCanada , 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 inthe United States andCanada , 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. 38 -------------------------------------------------------------------------------- Table of Contents 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 2021 Grant
Estimated fair value per of options granted: $ 6.77
Assumptions:
Annualized dividend yield 2.4 % Risk-free rate of return 0.7 % Common stock price volatility 56.7 % 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. 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 ofSeptember 30, 2021 , we had 144,155 shares available for grant in the future. During the three months endedSeptember 30, 2021 , the Company granted no 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. OnOctober 26, 2021 , the Company received notice that it was among 1,100 companies scheduled to receive a letter from theFederal Trade Commission ("FTC") regarding "Notices of Penalty Offenses Concerning Money-Making Opportunities and Endorsement and Testimonials."Mannatech received the letter onOctober 28, 2021 . The letters put companies on notice that they should be aware of what constitutes false or misleading income, earning, or product claims. As theFTC makes clear in the letter, receipt of the letter is not a determination of wrongdoing. From a procedural standpoint, theFTC would still have to file a formal action if they were to determine the Company is in violation of the parameters laid out in the letter and then undergo an administrative hearing process. The letter is the first step in a process for theFTC to impose "civil monetary penalties of up to$43,792 per violation." 39 -------------------------------------------------------------------------------- Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS InJune 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. InNovember 2019 , the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) ("ASU 2019-10") which defers the effective date for smaller reporting companies by three years toDecember 15, 2022 for fiscal years, and interim periods within those fiscal years, beginning after that date. This standard will be effective for the Company onJanuary 1, 2023 . 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 continues to evaluate 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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