MANNATECH, INCORPORATED The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three months endedMarch 31, 2020 as compared to the same period in 2019, and should be read in conjunction with Item 1 "Financial Statements" in Part I of this quarterly report on Form 10-Q. Item 1A "Risk Factors" in Part II of this quarterly report on Form 10-Q and Item 1A "Risk Factors" in Part I of our annual report on Form 10-K for the year endedDecember 31, 2019 . 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 OVERVIEWMannatech 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 25 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 until 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 decreased$1.4 million , or 3.6%, to$36.6 million , during the three months endedMarch 31, 2020 , as compared to the same period in 2019. For the three months endedMarch 31, 2020 , our net sales declined 0.5% on a Constant dollar basis (see Non-GAAP Measures, below); unfavorable foreign exchange caused a$1.2 million decrease in GAAP net sales as compared to the same period in 2019. For the three months endedMarch 31, 2020 and 2019, our operations outside of theAmericas accounted for approximately 68.0% and 68.7%, respectively, of our consolidated net sales. The net sales comparisons for the three months endedMarch 31, 2020 were primarily affected by the worldwide spread of COVID-19 resulting in a decrease in the number of product orders. • The number of product orders decreased by 2.6% to 210,567 for the three
months ended
in 2019. For the three months ended
order value increased 1.1%, to $183 , as compared to $181 for the same
period in 2019.
• The number of packs sold to, and associate fees paid by, new and
continuing independent associates and preferred customers decreased 7.8%during the first quarter of 2020 to 22,354, as compared to 24,348 during
the same period in 2019. The average value of packs and associate fees
decreased to $20 for the first quarter of 2020, as compared to $23 for the
same period in 2019.
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We have started to experience challenges in getting raw materials and ingredients to our contract manufacturers and finished products to our distribution centers resulting from reductions in global transportation capacity. We have taken steps to protect the health, safety and well-being of our customers, associates, employees, and communities by closing some offices and equipping various staff members to work remotely for an uncertain period of time. The full impact of COVID-19 continues to evolve and we are actively monitoring the global situation with a focus on our financial condition, liquidity, operations, suppliers, industry, and workforce. Excluding the effects due to the translation of foreign currencies intoU.S. dollars, net sales would have decreased$0.2 million for the three months endedMarch 31, 2020 compared to the same period in 2019. These adjusted net sales expressed in Constant dollars are a non-GAAP financial measure discussed in further detail below. RESULTS OF OPERATIONS
Three Months Ended
The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months endedMarch 31, 2020 and 2019 (in thousands, except percentages): Change from 2020 2019 2019 to 2020 Total % of Total % of dollars net sales dollars net sales Dollar Percentage Net sales$ 36,605 100.0 %$ 37,973 100.0 %$ (1,368 ) (3.6 )% Cost of sales 7,008 19.1 % 7,427 19.6 % (419 ) (5.6 )% Gross profit 29,597 80.9 % 30,546 80.4 % (949 ) (3.1 )% Operating expenses: Commissions and incentives 14,889 40.7 % 15,199 40.0 % (310 ) (2.0 )% Selling and administrative expenses 6,855 18.7 % 7,576 20.0 % (721 ) (9.5 )% Depreciation and amortization expense 520 1.4 % 528 1.4 % (8 ) (1.5 )% Other operating costs 5,322 14.5 % 6,123 16.1 % (801 ) (13.1 )% Total operating expenses 27,586 75.4 % 29,426 77.5 % (1,840 ) (6.3 )% Income from operations 2,011 5.5 % 1,120 2.9 % 891 79.6 % Interest income (expense) 50 0.1 % (95 ) (0.3 )% 145 152.6 % Other income (expense), net (208 ) (0.6 )% 4 - % (212 ) (5,300.0 )% Income before income taxes 1,853 5.1 % 1,029 2.7 % 824 80.1 % Benefit (provision) for income taxes 934 2.6 % (341 ) (0.9 )% 1,275 (373.9 )% Net income$ 2,787 7.6 %$ 688 1.8 %$ 2,099 305.1 % 23
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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 percentages) March 31, 2020 March 31, 2019 Constant $ Change GAAP Non-GAAP GAAP Measure: Measure: Measure: Total $ Constant $ Total $ Dollar Percent Net sales$ 36.6 $ 37.8 $ 38.0$ (0.2 ) (0.5 )% Product 35.9 37.0 37.2 (0.2 ) (0.5 )% Pack sales and associate fees 0.5 0.5 0.6 (0.1 ) (16.7 )% Other 0.2 0.2 0.2 - - % Gross profit 29.6 30.5 30.5 - - % Income from operations 2.0 2.3 1.1 1.2 109.1 % Net Sales Consolidated net sales for the three months endedMarch 31, 2020 decreased by$1.4 million , or 3.6%, to$36.6 million as compared to$38.0 million for the same period in 2019.
Consolidated net sales by region for the three months ended
Three Months Ended Three Months Ended
Region March 31, 2020 March 31, 2019
Americas $ 11.7 32.0 % $ 11.9 31.3 %
Asia/Pacific 21.4 58.5 % 22.8 60.0 %
EMEA 3.5 9.5 % 3.3 8.7 %
Total $ 36.6 100.0 % $ 38.0 100.0 %
For the three months ended March 31, 2020 , net sales in the Americas decreased
by $0.2 million , or 1.7%, to $11.7 million , as compared to $11.9 million for the
same period in 2019. This decrease was primarily due to a 31.1% decline in the
number of active independent associates and preferred customers, which was
partially offset by a 43.2% increase in revenue per active independent associate
and preferred customer.
For the three months ended March 31, 2020 , our operations outside of the
Americas accounted for approximately 68% of our consolidated net sales, whereas
in the same period in 2019, our operations outside of the Americas accounted for
approximately 68.7% of our consolidated net sales.
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For the three months endedMarch 31, 2020 ,Asia/Pacific net sales decreased by$1.4 million , or 6.1%, to$21.4 million , as compared to$22.8 million for the same period in 2019. This decrease was primarily due to a 10.9% decrease in the number of active independent associates and preferred customers, which was partially offset by a 6.3% increase in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of decreasing revenue by$0.9 million for the three months endedMarch 31, 2020 , as compared to the same period in 2019. The currency impact is primarily due to the weakening of the Korean Won, Australian Dollar, Chinese Yuan (Renminbi), New Zealand Dollar, and Singapore Dollar, which was partially offset by the strengthening of the Japanese Yen, Hong Kong Dollar and Taiwanese Dollar. For the three months endedMarch 31, 2020 , 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 2019. This increase was primarily due to a 17.4% increase in revenue per active independent associate and preferred customer, which was partially offset by a 9.5% decrease in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of decreasing revenue by$0.2 million for the three-month period endingMarch 31, 2020 as compared to the same period in 2019. The currency impact is primarily due to the weakening of the SouthAfrica Rand , the British Pound, and the Euro.
Our total sales and sales mix could be influenced by any of the following:
• the impact of the COVID-19 pandemic;
• changes in our sales prices;
• changes in shipping fees;
• changes in consumer demand;
• changes in the number of independent associates and preferred customers;
• changes in competitors' products;
• changes in economic conditions;
• changes in regulations;
• announcements of new scientific studies and breakthroughs;
• introduction of new products;
• discontinuation of existing products;
• adverse publicity;
• changes in our commissions and incentives programs;
• direct competition; and
• fluctuations in foreign currency exchange rates.
Our sales mix for the three months endedMarch 31 , was as follows (in millions, except percentages): Three Months Ended March 31, Change 2020 2019 Dollar Percentage Consolidated product sales$ 35.9 $ 37.2 $ (1.3 ) (3.5 )% Consolidated pack sales and associate fees 0.5 0.6 (0.1 ) (16.7 )% Consolidated other 0.2 0.2 - - % Total consolidated net sales$ 36.6 $ 38.0 $ (1.4 ) (3.7 )% 25
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Product Sales
Our product sales are made to our independent associates and preferred customers at published wholesale prices.
Product sales for the three months endedMarch 31, 2020 decreased by$1.3 million , or 3.5%, as compared to the same period in 2019. The decrease in product sales was primarily due to a decrease in the number of orders partially offset by an increase in the average order value. The average order value for the three months endedMarch 31, 2020 was$183 , as compared to$181 for the same period in 2019. The number of orders processed during the three months endedMarch 31, 2020 decreased by 2.6%, as compared to the same period in 2019.
Pack Sales and Associate Fees
The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year. The Company collected associate fees in lieu of pack sales withinthe United States ,Canada ,South Africa ,Japan ,Australia ,New Zealand ,Singapore ,Hong Kong ,Taiwan ,Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,the Netherlands ,Norway ,Spain ,Sweden and theUnited Kingdom . InKorea andMexico , packs may still be purchased by our associates who wish to build aMannatech business. We also do not collect associate fees or sell packs in our non-direct selling business in mainlandChina . These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. In certain of these markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials. The dollar amount of pack sales and associate fees associated with new and continuing independent associate positions held by individuals in our network was as follows, for the three months endedMarch 31 , (in millions, except percentages): Three Months Ended March 31, Change 2020 2019 Dollar Percentage New$ 0.1 $ 0.2 $ (0.1 ) (50.0 )% Continuing 0.4 0.4 - - % Total$ 0.5 $ 0.6 $ (0.1 ) (16.7 )% Total pack sales and associate fees for the three months endedMarch 31, 2020 decreased by$0.1 million , or 16.7%, to$0.5 million , as compared to$0.6 million for the same period in 2019. Average pack and associate fee value for the three months endedMarch 31, 2020 was$20 , as compared to$23 for the same period in 2019. The total number of packs and associate fees sold decreased by 1,994, or 8.2%, to 22,354 for the three months endedMarch 31, 2020 , as compared to the same period in 2019. 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. 26
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During 2019 and continuing into 2020, 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 endedMarch 31, 2020 and 2019 were as follows: 2020 2019 New 80,000 48.2 % 88,000 43.3 % Continuing 86,000 51.8 % 115,000 56.7 % Total 166,000 100.0 % 203,000 100.0 % As COVID-19 spread into our markets, recruitment of new independent associates and preferred customers decreased 8.2% in the first quarter of 2020, as compared to the first quarter of 2019. The number of new independent associate and preferred customer positions held by individuals in our network for the first quarter of 2020 was approximately 18,687, as compared to 20,363 for the same period in 2019. 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
Gross Profit
For the three months endedMarch 31, 2020 , gross profit decreased by$0.9 million , or 3.1%, to$29.6 million , as compared to$30.5 million for the same period in 2019. For the three months endedMarch 31, 2020 , gross profit as a percentage of net sales increased to 80.9%, as compared to 80.4% for the same period in 2019 due to improved product costs.
Commissions and Incentives
Commission expenses for the three months endedMarch 31, 2020 decreased by 4.2%, or$0.6 million , to$14.3 million , as compared to$14.9 million for the same period in 2019. For the three months endedMarch 31, 2020 , commissions as a percentage of net sales decreased to 39.1% from 39.3% for the same period in 2019.
Incentive costs for the three months ended
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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 endedMarch 31, 2020 , selling and administrative expenses decreased by$0.7 million , or 9.5%, to$6.9 million , as compared to$7.6 million for the same period in 2019. The decrease in selling and administrative expenses consisted of a$0.7 million decrease in payroll costs. Selling and administrative expenses, as a percentage of net sales, for the three months endedMarch 31, 2020 decreased to 18.7% from 20.0% for the same period in 2019.
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 endedMarch 31, 2020 , other operating costs decreased by$0.8 million , or 13.1%, to$5.3 million , as compared to$6.1 million for the same period in 2019. For the three months endedMarch 31, 2020 , other operating costs as a percentage of net sales decreased to 14.5% from 16.1% for the same period in 2019. The decrease in operating costs was primarily due to a$0.3 million decrease in office expenses, a$0.3 million decrease in legal and consulting fees and a$0.2 million decrease in travel and entertainment.
Depreciation and Amortization Expense
Depreciation and amortization expense was
Other Income (Expense), Net
Due to foreign exchange gains and losses, other expense was
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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 the three months endedMarch 31 : Country 2020 2019 Australia 30.0 % 30.0 % Canada 26.5 % 26.5 % China(1) 5.0 % 25.0 % Colombia(2) 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 34.6 % 30.2 % Mexico 30.0 % 30.0 % Norway 23.0 % 23.0 % Republic of Korea 22.0 % 22.0 % Russia(3) 20.0 % 20.0 % Singapore 17.0 % 17.0 % South Africa 28.0 % 28.0 % Sweden 22.0 % 22.0 % Switzerland(4) 9.2 % 9.2 % Taiwan 20.0 % 20.0 % Ukraine(5) 18.0 % 18.0 % United Kingdom 19.0 % 19.0 % United States 23.8 % 23.8 % (1)For 2020, 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)OnAugust 1, 2016 , the Company established a legal entity inRussia calledMannatech RUS Ltd. , but currently does not operate inRussia . (4)OnJuly 1, 2019 , the Company suspended operations inSwitzerland , but maintains the legal entity. (5)OnMarch 21, 2014 , the Company suspended operations in theUkraine , 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 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. The provision for income taxes is directly related to our profitability and changes in the taxable income among countries of operation. For the three months endedMarch 31, 2020 and 2019, the Company's effective tax rate was -50.4% and 33.2%, respectively. The effective tax rate for the three months endedMarch 31, 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 . Income tax related provisions of stimulus packages in foreign jurisdictions did not have a material impact to our recorded income tax benefit for the three months endedMarch 31, 2020 . We are evaluating the impact, if any, that stimulus packages in foreign jurisdictions may have on our future operations, financial position, and liquidity in fiscal year 2020. 29
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The effective tax rate for the three months ended
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
As ofMarch 31, 2020 , our cash and cash equivalents decreased by 1.1%, or$0.3 million , to$24.5 million from$24.8 million as ofDecember 31, 2019 . 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 ofMarch 31, 2020 andDecember 31, 2019 . The long-term portion of restricted cash balances were$5.0 million and$5.3 million atMarch 31, 2020 and 2019, respectively. Finally, fluctuations in currency rates produced a decrease of$1.6 million and an increase of$0.4 million in cash and cash equivalents for the three months endedMarch 31, 2020 and 2019, 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. AtMarch 31, 2020 andDecember 31, 2019 , our working capital was$13.2 million and$12.1 million , respectively.
Net Cash Flows
Our net consolidated cash flows consisted of the following, for the three months endedMarch 31 (in millions): Provided by/(Used in): 2020 2019 Operating activities$ 2.1 $ (0.1 ) Investing activities$ (0.2 ) $ (0.4 ) Financing activities$ (0.8 ) $ (0.6 ) Operating Activities Due to profitable operations, cash provided by operating activities was$2.1 million for the three months endedMarch 31, 2020 , compared to cash used in operating activities of$0.1 million for the same period in 2019. During the three months endedMarch 31, 2019 , sources of cash included income tax receivable, commissions and incentives payable, and taxes payable, and the uses of cash included deferred income taxes, prepaid expenses and other current assets, and accounts payable.
Investing Activities
For the three months endedMarch 31, 2020 and 2019, we invested cash of$0.2 million and$0.4 million , respectively. During the three months endedMarch 31, 2020 , we invested approximately$0.2 million in back-office software projects. During the three months endedMarch 31, 2019 , we invested approximately$0.3 million in back-office software projects,$0.1 million in leasehold improvements in various international offices and training centers.
Financing Activities
For the three months endedMarch 31, 2020 and 2019, our financing activities used cash of$0.8 million and$0.6 million , respectively. For the three months endedMarch 31, 2020 , we used$0.5 million in the repayment of capital lease obligations and$0.3 million in payments of dividends to shareholders. For the three months endedMarch 31, 2019 , we used$0.2 million in the repayment of capital lease obligations and$0.3 million in payments of dividends to shareholders. 30
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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. OnApril 10, 2020 , the Company received loan proceeds of$2,243,687 (the "Loan") under the Paycheck Protection Program ("PPP"). The PPP was established under the recent CARES Act and was administered by theU.S. Small Business Administration (the SBA). The Loan to the Company was made throughJPMorgan Chase Bank, N. A ., the Company's existing banker (the "Lender"). At the time the Company applied for and received the Loan, the Company planned to use the Loan proceeds for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. After the Company received the proceeds of the Loan, the SBA provided subsequent guidance interpreting the PPP. Based on such subsequent guidance, the Company made the determination to repay the Loan in full, which it did onApril 30, 2020 . OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency because of COVID-19 and the risks to the international community as the virus spreads globally beyond its point of origin. InMarch 2020 , the WHO declared the outbreak of COVID-19 as a pandemic, which has spread throughout our international regions and continues to spread throughoutthe United States . We are taking steps to protect the health, safety and well-being of our customers, associates, employees, and communities by closing some offices and equipping various staff members to work remotely for an uncertain period of time. The Company depends on an independent salesforce of distributors to market and sell its products to consumers. Developments such as social distancing and shelter-in-place directives could 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. For some products, the Company is experiencing shortages of raw materials and ingredients. We have started to experience challenges in getting these materials and ingredients to our contract manufacturers and finished products to our distribution centers resulting from reductions in global transportation capacity. Also, due to the impacts on the global supply chain, the Company may find obstacles in shipping to our customers. While the conditions described above are expected to be temporary, prolonged workforce disruptions, continued disruption in our supply chain and potential decreases in consumer demands may negatively impact sales in fiscal year 2020 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.
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CONTRACTUAL OBLIGATIONS
The following summarizes our future commitments and obligations associated with various agreements and contracts as ofMarch 31, 2020 , for the years endingDecember 31 (in thousands): Commitments and obligations Remaining 2020 2021 2022 2023 2024 2025 Thereafter Total Finance lease obligations $ 77$ 100 $ 74 $ 45 $ 21 $ 1 $ -$ 318 Purchase obligations (1)(2) 3,875 67 67 - - - - 4,009 Operating lease obligations (3) 1,511 1,613 1,196 605 612 611 1,528 (6) 7,676 Note payable and other financing arrangements 865 449 - - - - - 1,314 Employment agreements 440 - - - - - - 440 Royalty agreement 44 7 - - - - - 51 Tax liability (4) - - - - - - 194 194 Other obligations (5) 212 33 181 24 120 - 495 1,065 Total commitments and obligations $ 7,024$ 2,269 $ 1,518 $ 674 $ 753 $ 612 $ 2,217 $ 15,067 (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$15.8 million of finished product purchase orders that may be canceled or with delivery dates that have changed as ofMarch 31, 2020 . (3)Represents the minimum future payments, including imputed interest, for operating leases within the scope of Topic 842. Of the total present value of lease liabilities,$1.4 million was recorded in "Accrued expenses" and$5.0 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$0.3 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 ofMarch 31, 2020 .
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 ofMarch 31, 2020 , the estimated useful lives and net carrying values of fixed assets were as follows: Net carrying Estimated value at useful life March 31, 2020 Office furniture and equipment 5 to 7 years$0.8
million
Computer hardware and software 3 to 5 years 2.2 million Automobiles 3 to 5 years 0.1 million Leasehold improvements (1) 2 to 10 years 1.8 million Total$4.9 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 three months endedMarch 31, 2020 and the year endedDecember 31, 2019 .
Uncertain Income Tax Positions and Tax Valuation Allowances
As ofMarch 31, 2020 , 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 months endedMarch 31, 2020 . 34
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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 months endedMarch 31, 2020 , 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. AtMarch 31, 2020 andDecember 31, 2019 , deferred revenue was$5.2 million and$4.4 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 atMarch 31, 2020 andDecember 31, 2019 was$3.0 million and$3.1 million , respectively. Deferred revenue consisted primarily of: (i) sales of packs and products shipped but not received by the customers by the end of the respective period; (ii) revenue from the loyalty program; and (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event. In total current assets, 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$1.8 million at each ofMarch 31, 2020 andDecember 31, 2019 . Loyalty program (in thousands)
Loyalty deferred revenue as of
(4,348 )
Loyalty points used (9,127 )
Loyalty points vested 11,320
Loyalty points unvested 1,051
Loyalty deferred revenue as of
Loyalty deferred revenue as of
(678 )
Loyalty points used (2,524 )
Loyalty points vested 1,959
Loyalty points unvested 1,159
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 in the United
States and
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 fullsatisfaction guarantee refund if they have tried the product and are not
satisfied for any reason, excluding promotional materials. This
satisfaction guarantee refund applies in
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 therefund policy, we may terminate the associate's or preferred customer's
account.
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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. 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 ofMarch 31, 2020 , we had 149,393 shares available for grant in the future. During the three months endedMarch 31, 2020 , 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.
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 us 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 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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