MANNATECH INC000105635812/31Non-accelerated FilerTRUEFALSE10-Q9/30/20202020Q3FALSE2,087,791FALSEYesTRUEFALSEYes7877080.010.011,000,0001,000,0000.00010.000199,000,00099,000,0002,742,8572,742,8572,089,0022,381,131653,855361,726P3M0.70.20.20.20.30.3P2YP3YP10YP5YSUBSEQUENT EVENTSOn April 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 is administered by the U.S. Small Business Administration. The Loan to the Company was made through JPMorgan 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 on April 30, 2020.2,243,68700010563582020-01-012020-09-30xbrli:shares00010563582020-10-31iso4217:USD00010563582020-09-3000010563582019-12-31iso4217:USDxbrli:shares00010563582020-07-012020-09-3000010563582019-07-012019-09-3000010563582019-01-012019-09-300001056358us-gaap:CommonStockMember2019-12-310001056358us-gaap:AdditionalPaidInCapitalMember2019-12-310001056358us-gaap:RetainedEarningsMember2019-12-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001056358us-gaap:TreasuryStockMember2019-12-310001056358us-gaap:RetainedEarningsMember2020-01-012020-03-3100010563582020-01-012020-03-310001056358us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001056358us-gaap:TreasuryStockMember2020-01-012020-03-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001056358us-gaap:CommonStockMember2020-03-310001056358us-gaap:AdditionalPaidInCapitalMember2020-03-310001056358us-gaap:RetainedEarningsMember2020-03-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001056358us-gaap:TreasuryStockMember2020-03-3100010563582020-03-310001056358us-gaap:RetainedEarningsMember2020-04-012020-06-3000010563582020-04-012020-06-300001056358us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001056358us-gaap:TreasuryStockMember2020-04-012020-06-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300001056358us-gaap:CommonStockMember2020-06-300001056358us-gaap:AdditionalPaidInCapitalMember2020-06-300001056358us-gaap:RetainedEarningsMember2020-06-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-300001056358us-gaap:TreasuryStockMember2020-06-3000010563582020-06-300001056358us-gaap:RetainedEarningsMember2020-07-012020-09-300001056358us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001056358us-gaap:TreasuryStockMember2020-07-012020-09-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300001056358us-gaap:CommonStockMember2020-09-300001056358us-gaap:AdditionalPaidInCapitalMember2020-09-300001056358us-gaap:RetainedEarningsMember2020-09-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001056358us-gaap:TreasuryStockMember2020-09-300001056358us-gaap:CommonStockMember2018-12-310001056358us-gaap:AdditionalPaidInCapitalMember2018-12-310001056358us-gaap:RetainedEarningsMember2018-12-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001056358us-gaap:TreasuryStockMember2018-12-3100010563582018-12-310001056358us-gaap:RetainedEarningsMember2019-01-012019-03-3100010563582019-01-012019-03-310001056358us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-310001056358us-gaap:TreasuryStockMember2019-01-012019-03-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310001056358us-gaap:CommonStockMember2019-03-310001056358us-gaap:AdditionalPaidInCapitalMember2019-03-310001056358us-gaap:RetainedEarningsMember2019-03-310001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310001056358us-gaap:TreasuryStockMember2019-03-3100010563582019-03-310001056358us-gaap:RetainedEarningsMember2019-04-012019-06-3000010563582019-04-012019-06-300001056358us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-300001056358us-gaap:TreasuryStockMember2019-04-012019-06-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-04-012019-06-300001056358us-gaap:CommonStockMember2019-06-300001056358us-gaap:AdditionalPaidInCapitalMember2019-06-300001056358us-gaap:RetainedEarningsMember2019-06-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-300001056358us-gaap:TreasuryStockMember2019-06-3000010563582019-06-300001056358us-gaap:RetainedEarningsMember2019-07-012019-09-300001056358us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-300001056358us-gaap:TreasuryStockMember2019-07-012019-09-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300001056358us-gaap:CommonStockMember2019-09-300001056358us-gaap:AdditionalPaidInCapitalMember2019-09-300001056358us-gaap:RetainedEarningsMember2019-09-300001056358us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300001056358us-gaap:TreasuryStockMember2019-09-3000010563582019-09-30mtex:region0001056358country:KR2020-09-300001056358country:KR2019-12-310001056358us-gaap:OtherAssetsMember2020-09-300001056358us-gaap:OtherAssetsMember2019-12-310001056358mtex:AccruedExpensesMember2020-09-300001056358mtex:AccruedExpensesMember2019-12-310001056358mtex:OtherlongtermliabilitiesMember2020-09-300001056358mtex:OtherlongtermliabilitiesMember2019-12-310001056358mtex:SoftwareToolsMember2020-09-300001056358mtex:AssociateFeesMember2020-09-30xbrli:pure0001056358us-gaap:SalesReturnsAndAllowancesMember2018-12-310001056358us-gaap:SalesReturnsAndAllowancesMember2019-01-012019-12-310001056358us-gaap:SalesReturnsAndAllowancesMember2019-12-310001056358us-gaap:SalesReturnsAndAllowancesMember2020-01-012020-09-300001056358us-gaap:SalesReturnsAndAllowancesMember2020-09-3000010563582017-04-1700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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:  September 30, 2020
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2508900
(State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1410 Lakeside Parkway, Suite 200, Flower Mound, Texas 75028
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, including Area Code: (972) 471-7400
                Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareMTEXThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company x
Emerging Growth Company ¨

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x 

As of October 31, 2020, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share, was 2,087,791.



MANNATECH, INCORPORATED
TABLE OF CONTENTS
Part I – FINANCIAL INFORMATION 
  
  
  
  
Part II – OTHER INFORMATION 
  
  
  
  
  
  
  


Table of Contents
Special Note Regarding Forward-Looking Statements

Certain disclosures and analyses in this Form 10-Q, including information incorporated by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 that are subject to various risks and uncertainties. Opinions, forecasts, projections, guidance, or other statements other than statements of historical fact are considered forward-looking statements and reflect only current views about future events and financial performance. Some of these forward-looking statements include statements regarding:
management’s plans and objectives for future operations;
existing cash flows being adequate to fund future operational needs;
future plans related to budgets, future capital requirements, market share growth, and anticipated capital projects and obligations;
the realization of net deferred tax assets;
the ability to curtail operating expenditures;
global statutory tax rates remaining unchanged;
the impact of future market changes due to exposure to foreign currency translations;
the possibility of certain policies, procedures, and internal processes minimizing exposure to market risk;
the impact of new accounting pronouncements on financial condition, results of operations, or cash flows;
the outcome of new or existing litigation matters;
the outcome of new or existing regulatory inquiries or investigations; and
other assumptions described in this report underlying such forward-looking statements.
Although we believe that the expectations included in these forward-looking statements are reasonable, these forward-looking statements are subject to certain events, risks, assumptions, and uncertainties, including those discussed below, the “Risk Factors” section in Part I, Item 1A of our Form 10-K for the year ended December 31, 2019, and elsewhere in this Form 10-Q and the documents incorporated by reference herein. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results and developments could materially differ from those expressed in or implied by such forward-looking statements. For example, any of the following factors could cause actual results to vary materially from our projections:
the impact of the outbreak of the novel coronavirus ("COVID-19") pandemic;
overall growth or lack of growth in the nutritional supplements industry;
plans for expected future product development;
changes in manufacturing costs;
shifts in the mix of packs and products;
the future impact of any changes to global associate career and compensation plans or incentives or the regulations governing such plans and incentives;
the ability to attract and retain independent associates and preferred customers;
new regulatory changes that may affect operations, products or compensation plans or incentives;
the competitive nature of our business with respect to products and pricing;
publicity related to our products or network-marketing; and
the political, social, and economic climate of the countries in which we operate.
Forward-looking statements generally can be identified by use of phrases or terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “projects,” "hopes," “potential,” and “continues” or other similar words or the negative of such terms and other comparable terminology. Similarly, descriptions of Mannatech’s objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. Readers are cautioned when considering these forward-looking statements to keep in mind these risks, assumptions, and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speak only as of the date of this report.

Unless stated otherwise, all financial information throughout this report and in the Consolidated Financial Statements and related Notes include Mannatech, Incorporated and all of its subsidiaries on a consolidated basis and may be referred to herein as “Mannatech,” “the Company,” “its,” “we,” “us,” “our,” or “their.”

Our products are not intended to diagnose, cure, treat, or prevent any disease, and any statements about our products contained in this report have not been evaluated by the Food and Drug Administration, also referred to herein as the “FDA”.
1

Table of Contents
 PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETSSeptember 30, 2020 (unaudited)December 31, 2019
Cash and cash equivalents$21,234 $24,762 
Restricted cash943 943 
Accounts receivable, net of allowance of $787 and $708 in 2020 and 2019, respectively144 955 
Income tax receivable825 220 
Inventories, net13,512 10,152 
Prepaid expenses and other current assets2,516 2,239 
Deferred commissions1,729 1,758 
Total current assets40,903 41,029 
Property and equipment, net4,007 5,261 
Construction in progress1,411 865 
Long-term restricted cash4,049 5,295 
Other assets11,712 9,592 
Long-term deferred tax assets, net963 881 
Total assets$63,045 $62,923 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Current portion of finance leases$77 $87 
Accounts payable4,763 3,526 
Accrued expenses7,823 8,209 
Commissions and incentives payable9,807 9,728 
Taxes payable1,080 2,187 
Current notes payable689 739 
Deferred revenue5,034 4,416 
Total current liabilities29,273 28,892 
Finance leases, excluding current portion152 176 
Deferred tax liabilities3 3 
Long-term notes payable 363 
Other long-term liabilities7,373 6,214 
Total liabilities36,801 35,648 
Commitments and contingencies
Shareholders’ equity:  
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding  
Common stock, $0.0001 par value, 99,000,000 shares authorized, 2,742,857 shares issued and 2,089,002 shares outstanding as of September 30, 2020 and 2,742,857 shares issued and 2,381,131 shares outstanding as of December 31, 2019  
Additional paid-in capital33,765 34,143 
Retained earnings (accumulated deficit)3,908 (690)
Accumulated other comprehensive income3,350 3,757 
Treasury stock, at average cost, 653,855 shares as of September 30, 2020 and 361,726 shares as of December 31, 2019(14,779)(9,935)
Total shareholders’ equity26,244 27,275 
Total liabilities and shareholders’ equity$63,045 $62,923 
See accompanying notes to unaudited consolidated financial statements.
2

Table of Contents
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED)
(in thousands, except per share information)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net sales$37,966 $39,656 $112,218 $118,340 
Cost of sales9,328 7,711 25,044 23,253 
Gross profit28,638 31,945 87,174 95,087 
Operating expenses:    
Commissions and incentives15,089 16,696 45,308 48,190 
Selling and administrative expenses6,639 8,951 20,659 24,908 
Depreciation and amortization expense468 519 1,525 1,564 
Other operating costs5,062 5,214 15,180 16,721 
Total operating expenses27,258 31,380 82,672 91,383 
Income from operations1,380 565 4,502 3,704 
Interest income (expense), net10 (12)73 (83)
Other income (expense), net248 (430)206 554 
Income before income taxes1,638 123 4,781 4,175 
Income tax (provision) benefit(22)(1,613)753 (2,991)
Net income (loss)$1,616 $(1,490)$5,534 $1,184 
Earnings per common share:    
Basic$0.77 $(0.62)$2.42 $0.50 
Diluted$0.76 $(0.62)$2.38 $0.47 
Weighted-average common shares outstanding:    
Basic2,098 2,391 2,286 2,393 
Diluted2,135 2,391 2,312 2,450 

MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – (UNAUDITED)
(in thousands)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net income (loss)$1,616 $(1,490)$5,534 $1,184 
Foreign currency translations679 (763)(407)(1,393)
Comprehensive income (loss)$2,295 $(2,253)$5,127 $(209)
 
See accompanying notes to unaudited consolidated financial statements.
3

Table of Contents
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)
 Common stock
Par value
Additional
paid-in
capital
Retained
earnings (accumulated deficit)
Accumulated
other
comprehensive
income
Treasury
stock
Total
shareholders’
equity
Balance at January 1, 2020$ $34,143 $(690)$3,757 $(9,935)$27,275 
Net income— — 2,787 — — 2,787 
Payment of cash dividends— — (300)— — (300)
Charge related to stock-based compensation— 83 — — — 83 
Issuance of unrestricted shares— (163)— — 373 210 
Repurchase of common stock— — — — (86)(86)
Foreign currency translations— — — (1,634)— (1,634)
Balance at March 31, 2020$ $34,063 $1,797 $2,123 $(9,648)$28,335 
Net income— — 1,130 — — 1,130 
Payment of cash dividends— — (299)— — (299)
Charge related to stock-based compensation— 34 — — — 34 
Stock option exercises— (333)— — 333  
Repurchase of common stock— — — — (5,109)(5,109)
Foreign currency translations— — — 548 — 548 
Balance at June 30, 2020$ $33,764 $2,628 $2,671 $(14,424)$24,639 
Net income— — 1,655 — — 1,616 
Payment of cash dividends— — (336)— — (336)
Charge related to stock-based compensation— 1 — — — 1 
Repurchase of common stock— — — — (355)(355)
Foreign currency translations— — — 679 — 679 
Balance at September 30, 2020$ $33,765 $3,908 $3,350 $(14,779)$26,244 

4

Table of Contents
Common stock
Par value
Additional
paid-in
capital
Accumulated deficitAccumulated
other
comprehensive
income
Treasury
stock
Total
shareholders’
equity
Balance at January 1, 2019$ $33,939 $(2,782)$4,337 $(10,170)$25,324 
Net income— — 688 — — 688 
Payment of cash dividends— — (303)— — (303)
Charge related to stock-based compensation— 107 — — — 107 
Issuance of unrestricted shares— (141)— — 421 280 
Repurchase of common stock— — — — (9)(9)
Foreign currency translations— — — (441)— (441)
Balance at March 31, 2019$ $33,905 $(2,397)$3,896 $(9,758)$25,646 
Net income— — 1,987 — — 1,987 
Payment of cash dividends— — (300)— — (300)
Charge related to stock-based compensation— 160 — — — 160 
Stock option exercises— (39)— — 38 (1)
Repurchase of common stock— — — — (58)(58)
Foreign currency translations— — — (189)— (189)
Balance at June 30, 2019$ $34,026 $(710)$3,707 $(9,778)$27,245 
Net loss— — (1,490)— — (1,490)
Payment of cash dividends— — (299)— — (299)
Charge related to stock-based compensation— 106 — — — 106 
Issuance of unrestricted shares— (71)— — 71  
Repurchase of common stock— — — — (154)(154)
Foreign currency translations— — — (763)— (763)
Balance at September 30, 2019$ $34,061 $(2,499)$2,944 $(9,861)$24,645 

See accompanying notes to unaudited consolidated financial statements.
5

Table of Contents
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)
(in thousands)
 Nine Months Ended
September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$5,534 $1,184 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
  
Depreciation and amortization1,525 1,564 
Non-cash operating lease expense1,746 1,219 
Provision for inventory losses418 857 
Provision for doubtful accounts116 (32)
Loss on disposal of assets(1)62 
Charge related to stock-based compensation328 653 
Deferred income taxes(82)999 
Changes in operating assets and liabilities:  
Accounts receivable695 (38)
Income tax receivable(605)172 
Inventories(3,778)(199)
Prepaid expenses and other current assets(359)1,976 
Deferred commissions29 93 
Other assets(1,097)850 
Accounts payable1,237 (2,049)
Accrued expenses and other liabilities(2,015)(177)
Taxes payable(1,107)444 
Commissions and incentives payable79 (1,854)
Deferred revenue618 428 
Net cash provided by operating activities3,281 6,152 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Acquisition of property and equipment(759)(998)
Proceeds from sale of assets(8)— 
Net cash used in investing activities(767)(998)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Repurchase of common stock(5,550)(221)
Payment of cash dividends(936)(902)
Proceeds from Paycheck Protection Program note payable2,244 — 
Repayment of Paycheck Protection Program note payable(2,244)— 
Repayment of other notes payable and finance lease obligations (373)(968)
Net cash used in financing activities(6,859)(2,091)
Effect of currency exchange rate changes on cash and cash equivalents(429)(1,346)
Net (decrease) increase in cash, cash equivalents, and restricted cash(4,774)1,717 
Cash, cash equivalents, and restricted cash at the beginning of the period31,000 30,584 
Cash, cash equivalents, and restricted cash at the end of the period$26,226 $32,301 
 

See accompanying notes to unaudited consolidated financial statements.


6

Table of Contents
Nine Months Ended
September 30,
20202019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:  
Income taxes paid$969 $1,089 
Interest paid on finance leases and other financing arrangements$56 93 
Assets acquired through other financing arrangements 25 
Operating lease right-of-use assets recorded upon adoption of ASC 842 4,730 
Finance lease right-of-use assets recorded upon adoption of ASC 842 76 
Operating lease right-of-use assets acquired in exchange for new operating lease liabilities2,769 2,916 
Finance lease right-of-use assets acquired in exchange for new finance lease liabilities47 236 
See accompanying notes to unaudited consolidated financial statements.



7

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



    
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Flower Mound, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the Nasdaq Global Select Market under the symbol “MTEX”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products. We currently sell our products into three regions: (i) the Americas (the United States, Canada and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).

Active business building associates ("independent associates" or "associates" or "distributors") and preferred customers purchase the Company’s products at published wholesale prices. The Company cannot distinguish products sold for personal use from other sales, when sold to associates, because it is not involved with the products after delivery, other than usual and customary product warranties and returns. Only associates are eligible to earn commissions and incentives. The Company operates a non-direct selling business in mainland China. Our subsidiary in China, Meitai Daily Necessity & Health Products Co., Ltd. (“Meitai”), is operating as a traditional retailer under a cross-border e-commerce model in China. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the Company’s consolidated financial statements and footnotes contained herein do not include all of the information and footnotes required by GAAP to be considered “complete financial statements”. However, in the opinion of the Company’s management, the accompanying unaudited consolidated financial statements and footnotes contain all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s consolidated financial information as of, and for, the periods presented. The Company cautions that its consolidated results of operations for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, 2019 consolidated balance sheet was included in the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2019 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 26, 2020 (the “2019 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2019 Annual Report.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus ("COVID-19") and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic, which has spread throughout our international regions and the United States. We have closed some offices and have begun to work remotely for an uncertain period of time.

The Company depends on an independent sales force of distributors to market and sell its products to consumers. Developments such as social distancing and shelter-in-place directives 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.

For some products, the Company experienced shortages of raw materials, packaging supplies and ingredients. We have experienced 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.

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. 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.



8

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation

The consolidated financial statements and footnotes include the accounts of Mannatech and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the Company’s consolidated financial statements in accordance with GAAP requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors. The Company continually evaluates the information used to make these estimates as the business and economic environment changes. Historically, actual results have not varied materially from the Company’s estimates and the Company does not currently anticipate a significant change in its assumptions related to these estimates. However, actual results may differ from these estimates under different assumptions or conditions.

The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered the most significant are described in this note to the consolidated financial statements, Organization and Summary of Significant Accounting Policies.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includes in its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are received within 24 to 72 hours. As of September 30, 2020 and December 31, 2019, credit card receivables were $2.5 million and $0.7 million, respectively. As of September 30, 2020 and December 31, 2019, cash and cash equivalents held in bank accounts in foreign countries totaled $15.9 million and $18.2 million, respectively. The Company invests cash in liquid instruments, such as money market funds and interest-bearing deposits. The Company also holds cash in high quality financial institutions and does not believe it has an excessive exposure to credit concentration risk.

    A significant portion of our cash and cash equivalent balances were concentrated within the Republic of Korea, with total net assets within this foreign location totaling $17.8 million and $19.2 million at September 30, 2020 and December 31, 2019, respectively. In addition, for the three and nine months ended September 30, 2020 and 2019, a concentrated portion of our operating cash flows were earned from operations within the Republic of Korea.  An adverse change in economic conditions within the Republic of Korea could negatively affect the Company’s results of operations.   

The Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) the Australia building lease collateral. As of September 30, 2020 and December 31, 2019, our total restricted cash was $5.0 million and $6.2 million, respectively.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows (in thousands):
September 30, 2020December 31, 2019
Cash and cash equivalents at beginning of period$24,762 $21,845 
Current restricted cash at beginning of period943 1,514 
Long-term restricted cash at beginning of period5,295 7,225 
Cash, cash equivalents, and restricted cash at beginning of period$31,000 $30,584 
Cash and cash equivalents at end of period$21,234 $24,762 
Current restricted cash at end of period943 943 
Long-term restricted cash at end of period4,049 5,295 
Cash, cash equivalents, and restricted cash at end of period$26,226 $31,000 

9

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable are carried at their estimated collectible amounts. Receivables are created upon shipment of an order if the credit card payment is rejected or does not match the order total. As of September 30, 2020 and December 31, 2019, receivables consisted primarily of amounts due from preferred customers and associates. As of September 30, 2020 and December 31, 2019, the Company's accounts receivable balance (net of allowance) was $0.1 million and $1.0 million, respectively. The Company periodically evaluates its receivables for collectability based on historical experience, recent account activities, and the length of time receivables are past due and writes-off receivables when they become uncollectible. As of September 30, 2020 and December 31, 2019, the Company held an allowance for doubtful accounts of $0.8 million and $0.7 million, respectively.

Inventories

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

Other Assets

As of September 30, 2020 and December 31, 2019, other assets were $11.7 million and $9.6 million, respectively. These amounts primarily consisted of right-of-use assets related to operating leases for office space and equipment, net of lease incentives, of $7.0 million and $5.6 million as of September 30, 2020 and December 31, 2019, respectively. See Note 8, Leases for more information on these assets. Also included in Other Assets were deposits for building leases in various locations of $2.1 million and $2.2 million as of September 30, 2020 and December 31, 2019, respectively. Additionally, included in the September 30, 2020 and December 31, 2019 balances were $2.4 million and $1.6 million, respectively, representing a deposit with Mutual Aid Cooperative and Consumer in the Republic of Korea, an organization established by the Republic of Korea’s Fair Trade Commission to protect consumers who participate in network marketing activities. Finally, each of the September 30, 2020 and December 31, 2019 balances included $0.2 million of indefinite lived intangible assets relating to the Manapol® powder trademark.

Accrued Expenses

As of September 30, 2020 and December 31, 2019, accrued expenses were $7.8 million and $8.2 million, respectively. These amounts primarily consisted of $2.1 million and $2.3 million representing employee benefits, which included accrued wages, bonus and severance as of September 30, 2020 and December 31, 2019, respectively. Also included in the September 30, 2020 and December 31, 2019 balances were non-inventory accrued liabilities of $2.0 million and $2.2 million, respectively. Additionally, included in the September 30, 2020 and December 31, 2019 balances were $1.9 million and $1.6 million for the current portion of operating lease liabilities, respectively, and $1.0 million and $0.9 million for accrued auditing and accounting fees, respectively. At September 30, 2020 and December 31, 2019 other accrued expenses were $0.8 million and $1.2 million, respectively.

Notes Payable

Notes payable were $0.7 million and $1.1 million as of September 30, 2020 and December 31, 2019, respectively, as a result of funding from a capital financing agreement related to our investment in leasehold improvements, computer hardware and software and other financing arrangements. At each of September 30, 2020 and December 31, 2019 , the current portion was $0.7 million.

On April 10, 2020, the Company received loan proceeds of $2.2 million (the “Loan”) under the Paycheck Protection Program (“PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (the “SBA”) The Loan to the Company was made through JPMorgan 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 on April 30, 2020.


10

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Other Long-Term Liabilities

Other long-term liabilities were $7.4 million and $6.2 million as of September 30, 2020 and December 31, 2019, respectively.  As of September 30, 2020 and December 31, 2019, the balance is primarily composed of long-term operating lease obligations of $6.4 million and $5.3 million, respectively. See Note 8, Leases for more information. Additionally, as of September 30, 2020 and December 31, 2019, the Company recorded $0.2 million in other long-term liabilities related to uncertain income tax positions (see Note 7, Income Taxes, of the Company’s 2019 Annual Report). Certain operating leases for the Company’s regional office facilities contain a restoration clause that requires the Company to restore the premises to its original condition. At each of September 30, 2020 and December 31, 2019, accrued restoration costs related to these leases amounted to $0.3 million. At each of September 30, 2020 and December 31, 2019, the Company also recorded a long-term liability for estimated defined benefit obligation related to a non-U.S. defined benefit plan for its Japan operations of $0.3 million (see Note 9, Employee Benefit Plans, of the Company’s 2019 Annual Report).

Revenue Recognition

The Company’s revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of the Company’s product sales are made at published wholesale prices to associates and preferred customers. The Company records revenue net of any sales taxes and records a reserve for expected sales returns based on its historical experience. The Company recognizes revenue from shipped products when control of the product transfers to the customer, thus the performance obligation is satisfied. Corporate-sponsored event revenue is recognized when the event is held.
Revenues from associate fees relate to providing associates with the right to earn commissions, benefits and incentives for an annual period. Revenue from software tools included in the first contractual year is recognized over three months and revenue from associate fees is recognized over 12 months (see Contracts with Multiple Performance Obligations for recognition guidelines). Almost all orders are paid via credit card. See Note 10, Segment Information, for disaggregation of revenues by geographic segment and type.
The Company collected associate fees within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, Taiwan, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, Spain, Sweden and the United Kingdom.

    Contracts with Multiple Performance Obligations

Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (a) the sale of the product and (b) the loyalty program. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. The transaction price is allocated between the product sale and the loyalty program on a relative standalone selling price basis. Sales placed through a one-time order contain only the first performance obligation noted above - the sale of the product.

The Company provides associates with access to a complimentary three-month package for the Success TrackerTM and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations: (a) the associate fee, whereby the Company provides an associate with the right to earn commissions, bonuses and incentives for a year; (b) three months of complimentary access to utilize the Success Tracker™ online tool; and (c) three months of complimentary access to utilize the Mannatech+ online business tool. The transaction price is allocated between the three performance obligations on a relative standalone selling price basis. Associates do not have complimentary access to online business tools after the first contractual period.

With regards to both of the aforementioned contracts, the Company determines the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts.

    Deferred Commissions

The Company defers commissions on (i) the sales of products shipped but not received by customers by the end of the respective period and (ii) the loyalty program. Deferred commissions are incremental costs and are amortized to expense consistent with how the related revenue is recognized. Deferred commissions were $1.8 million for the year ended December 31, 2019. Of this balance, $1.0 million was amortized to commissions expense for the nine months ended September 30, 2020. At September 30, 2020, deferred commissions were $1.7 million.

11

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

    Deferred Revenue

    The Company defers certain components of its revenue. Deferred revenue consisted of: (i) sales of products shipped but not received by customers by the end of the respective period; (ii) revenue from the loyalty program; (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event; and (iv) prepaid annual associate fees. At December 31, 2019, the Company’s deferred revenue was $4.4 million. Of this balance, $2.6 million was recognized as revenue for the nine months ended September 30, 2020. At September 30, 2020, the Company’s deferred revenue was $5.0 million.

The Company’s customer loyalty program conveys a material right to the customer as it provides the promise to redeem loyalty points for the purchase of products, which is based on earning points through placing consecutive qualified automatic orders. The Company factors in breakage rates, which is the percentage of the loyalty points that are expected to be forfeited or expire, for purposes of revenue recognition. Breakage rates are estimated based on historical data and can be reasonably and objectively determined. The deferred revenue associated with the loyalty program at September 30, 2020 and December 31, 2019 was $3.2 million and $3.1 million, respectively.
Loyalty program(in thousands)
Loyalty deferred revenue as of January 1, 2019$4,231 
Loyalty points forfeited or expired(4,348)
Loyalty points used(9,127)
Loyalty points vested11,320 
Loyalty points unvested1,051 
Loyalty deferred revenue as of December 31, 2019$3,127 

Loyalty deferred revenue as of January 1, 2020$3,127 
Loyalty points forfeited or expired(2,601)
Loyalty points used(6,879)
Loyalty points vested8,404 
Loyalty points unvested1,145 
Loyalty deferred revenue as of September 30, 2020$3,196 

    Sales Refund and Allowances
The Company utilizes the expected value method, as set forth by Accounting Standard Codification ("ASC") Topic 606 Revenue from Contracts with Customers ("ASC 606"), to estimate the sales returns and allowance liability by taking the weighted average of the sales return rates over a rolling six-month period. The Company allocates the total amount recorded within the sales return and allowance liability as a reduction of the overall transaction price for the Company’s product sales. The Company deems the sales refund and allowance liability to be a variable consideration.

12

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Historically, sales returns have not materially changed through the years, as the majority of our customers who return their merchandise do so within the first 90 days after the original sale. Sales returns have historically averaged 1.5% or less of our gross sales. For the nine months ended September 30, 2020 our sales return reserve consisted of the following (in thousands):
Sales reserve as of January 1, 2019$76 
Provision related to sales made in current period1,037 
Adjustment related to sales made in prior periods31 
Actual returns or credits related to current period(973)
Actual returns or credits related to prior periods(103)
Sales reserve as of December 31, 2019$68 
Sales reserve as of January 1, 2020$68 
Provision related to sales made in current period722 
Adjustment related to sales made in prior periods5 
Actual returns or credits related to current period(647)
Actual returns or credits related to prior periods(68)
Sales reserve as of September 30, 2020$80 

    Shipping and Handling Costs

The Company records inbound freight as a component of inventory and cost of sales. The Company records freight and shipping fees collected from its customers as fulfillment costs. In accordance with ASC 606-10-25-18a, freight and shipping fees are not deemed to be separate performance obligations as these activities occur before the customer receives the product.
Commissions and Incentives

Associates earn commissions and incentives based on their direct and indirect commissionable net sales over each month of the fiscal year. The Company accrues commissions and incentives when earned by associates and pays commissions on product and pack sales on a monthly basis.

Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s comprehensive income consists of the Company’s net income, foreign currency translation adjustments from its Japan, Republic of Korea, Taiwan, Denmark, Norway, Sweden, Colombia, Mexico and China operations, remeasurement of intercompany balances classified as equity in its Korea, Mexico, Colombia, and Cyprus operations, and changes in the pension obligation for its Japanese employees.

Recently Adopted Accounting Pronouncements

    The Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) ("ASU 2016-02") as of January 1, 2019 and applied it on a modified retrospective basis approach and elected to not adjust periods prior to January 1, 2019. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the carry forward of the historical lease classification. This new standard requires companies to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The adoption increased assets, net of incentive, by $4.7 million and liabilities by $6.1 million on our consolidated balance sheets and did not have a significant impact on our consolidated statement of operations and statements of cash flows. These leases primarily relate to office buildings and office equipment. See Note 8, Leases for more information.

13

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Income Statement - Reporting Comprehensive Income, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220) ("ASU 2018-02"), which amended its standard on comprehensive income to provide an option for an entity to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the "TCJA") that was passed in December of 2017 from accumulated other comprehensive income directly to retained earnings.  The stranded tax effects result from the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement.  This is a one-time amendment applicable only to the changes resulting from the TCJA. The Company adopted this standard on January 1, 2019. The overall financial impact of adopting this standard did not have a material effect on our consolidated financial statements.
    Accounting Pronouncements Issued But Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This standard adds to U.S. 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. In November 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 to December 15, 2022 for fiscal years, and interim periods within those fiscal years, beginning after that date. Accordingly, this standard will be effective for the Company as of January 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 continuing to evaluate whether the new guidance will have an impact on our consolidated financial statements or existing internal controls.

    Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future financial statements.


NOTE 2: INVENTORIES

Inventories consist of raw materials, finished goods, and promotional materials. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories as of September 30, 2020 and December 31, 2019, consisted of the following (in thousands):
 September 30, 2020December 31, 2019
Raw materials$2,716 $2,685 
Finished goods11,320 8,341 
Inventory reserves for obsolescence(524)(874)
Total$13,512 $10,152 


NOTE 3: INCOME TAXES

For the three and nine months ended September 30, 2020, the Company’s effective tax rate was 1.3% and (15.8)%, respectively. For the three and nine months ended September 30, 2019, the Company’s effective tax rate was 1,311.4% and 71.6%, respectively. For the three and nine months ended September 30, 2020 and 2019, the Company's effective tax rate was determined based on the estimated annual effective income tax rate.


14

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The effective tax rate for the three months ended September 30, 2020 was different from the federal statutory rate due primarily to the mix of earnings across jurisdictions and adjustments to valuation allowances in certain jurisdictions. The effective tax rate for the nine months ended September 30, 2020 was different from the federal statutory rate due primarily to the $1.2 million benefit recorded in connection with the carryback of U.S. net operating losses as allowed by the CARES Act, enacted on March 27, 2020.

The effective tax rates for the three and nine months ended September 30, 2019 were different from the federal statutory rate due primarily to the mix of earnings across jurisdictions, valuation allowance recorded on losses in certain jurisdictions and the one-time impact of the shift in the procurement supply chain from Switzerland to the United States effective July 1, 2019, which required a valuation allowance on Switzerland's deferred tax asset.

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 and nine months ended September 30, 2020. We are evaluating the impact, if any, that stimulus packages in foreign jurisdictions may have on the Company's future operations, financial position, and liquidity in fiscal year 2020.

NOTE 4: EARNINGS PER SHARE

    The Company calculates basic Earnings per Share ("EPS") by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS also reflects the potential dilution that could occur if common stock were issued for awards outstanding under the Mannatech, Incorporated 2017 Stock Incentive Plan (described below).

    In determining the potential dilutive effect of outstanding stock options for each of the three and nine months ended September 30, 2020, the Company used the quarterly and nine month ended average common stock close price of $17.00 and $14.76 per share, respectively.

For the three and nine months ended September 30, 2020, there were 2.10 million and 2.29 million weighted-average common shares outstanding used for the basic EPS calculation, respectively. For each of the three and nine months ended September 30, 2020, approximately 0.03 million shares subject to options were included in the calculation resulting in 2.13 million and 2.31 million dilutive shares used to calculate diluted EPS, respectively. For the three and nine months ended September 30, 2020, approximately 0.1 million and 0.8 million shares of the Company's common stock subject to options were excluded from the diluted EPS calculation as the effect would have been antidilutive.

    In determining the potential dilutive effect of outstanding stock options for each of the three and nine months ended September 30, 2019, the Company used the quarterly and nine month ended average common stock close price of $16.16 and $17.50 per share, respectively.

For the three months ended September 30, 2019, approximately 0.3 million shares of the Company's common stock subject to options were excluded from the diluted EPS calculation, as the effect would have been antidilutive. The Company reported a net loss for three months ended September 30, 2019.

For the nine months ended September 30, 2019, there were 2.39 million weighted-average common shares outstanding used for the basic EPS calculation. For the nine months ended September 30, 2019, approximately 0.06 million shares subject to options were included in the calculation resulting in 2.45 million dilutive shares used to calculate diluted EPS. For the nine months ended September 30, 2019, approximately 0.7 million of the Company's common stock subject to options were excluded from the diluted EPS calculation as the effect would have been antidilutive.

15

MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: STOCK-BASED COMPENSATION

The Company currently has one active stock-based compensation plan, the Mannatech, Incorporated 2017 Stock Incentive Plan, which was adopted by the Company’s Board of Directors (the "Board") on April 17, 2017 and was approved by its shareholders on June 8, 2017, and subsequently amended by the Board at its February 2019 special meeting, which amendment was approved by the Company's shareholders on June 11, 2019 (as amended, the "2017 Plan"). The 2017 Plan supersedes the Mannatech, Incorporated 2008 Stock Incentive Plan (as amended, the "2008 Plan"), which was set to expire on February 20, 2018. The Board has reserved a maximum of 370,000 shares of our common stock that may be issued under the 2017 Plan (subject to adjustments for stock splits, stock dividends or other changes in corporate capitalization). As of September 30, 2020, the Company had a total of 174,393 shares available for grant under the 2017 Plan, which expires on April 16, 2027.

The 2017 Plan provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock and performance stock units to our employees, board members, and consultants. However, only employees of the Company and its corporate subsidiaries are eligible to receive incentive stock options. The exercise price per share for all stock options will be no less than the market value of a share of common stock on the date of grant. Any incentive stock option granted to an employee owning more than 10% of our common stock will have an exercise price of no less than 110% of our common stock’s market value on the grant date.

The majority of stock options vest over two or three years, and generally are granted with a term of ten years, or five years in the case of an incentive option granted to an employee who owns more than 10% of our common stock.

The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the nine months ended September 30, 2020 and 2019, the Company granted 5,000 and 15,000 stock options, respectively. The fair value of stock options granted during the nine months ended September 30, 2020 and 2019 was approximately $4.00 and $6.88 per share, respectively. The Company recognized compensation expense as follows for the three and nine months ended September 30 (in thousands):

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Total gross compensation expense$7 $106 $118 $374 
Total tax benefit associated with compensation expense1 4 8 20 
Total net compensation expense$6 $102 $110 $354 
 
As of September 30, 2020, the Company expects to record compensation expense in the future as follows (in thousands):
Three months
ending
December 31,
2020
Year ending December 31,
 202120222023
Total gross unrecognized compensation expense$6 $15 $3 $ 
Tax benefit associated with unrecognized compensation expense1 3 1  
Total net unrecognized compensation expense$5 $12 $2 $ 

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MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6: SHAREHOLDERS’ EQUITY

Treasury Stock

On May 29, 2020, the Company commenced a modified Dutch auction cash tender offer to purchase up to $5.0 million of its outstanding common stock, par value $0.0001 per share, at a per share price not greater than $17.00 nor less than $15.00, to each seller in cash, less any applicable withholding taxes and without interest (the "tender offer"). The tender offer expired on June 25, 2020. As a result of the tender offer, the Company accepted for purchase a total of 294,117 shares of its common stock, which were properly tendered and not properly withdrawn at the price of $17.00 per share, for an aggregate purchase price of $5.0 million, which was funded from cash on hand. Due to the tender offer being oversubscribed, the Company purchased only a prorated portion of those shares properly tendered by each tendering shareholder (other than "odd lot" holders whose shares were purchased on a priority basis) at or below the final per share purchase price. The final proration factor for the tender offer was approximately 86%. These common shares represented approximately 12.31% of the Company's total outstanding shares as of April 30, 2020.

    During the three months ended September 30, 2020, the Company repurchased 12,238 additional shares of its common stock outstanding at an average price of $17.06. During the three months ended September 30, 2019, the Company repurchased 9,560 additional shares of its common stock outstanding at an average price of $16.07.

During the nine months ended September 30, 2020, the Company repurchased 323,660 shares of its common stock, which includes the 294,117 shares repurchased pursuant to the tender offer, at an average price of $16.92. During the nine months ended September 30, 2019, the Company repurchased 14,097 shares of its common stock, at an average price of $16.38.

As of September 30, 2020, the Company had 2,089,002 shares of common stock outstanding.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income, reflected in the Consolidated Statement of Shareholders’ Equity, represents net income plus the results of certain shareholders’ equity changes not reflected in the Consolidated Statements of Operations, such as foreign currency translation and certain pension and post-retirement benefit obligations. The after-tax components of accumulated other comprehensive income, are as follows (in thousands):
 Foreign
Currency
Translation
Pension
Postretirement
Benefit
Obligation
Accumulated
Other
Comprehensive
Income, Net
Balance as of December 31, 2019$3,435 $322 $3,757 
Current-period change (1)
(407) (407)
Balance as of September 30, 2020$3,028 $322 $3,350 
(1)No material amounts reclassified from accumulated other comprehensive income.

Dividends

On February 14, 2020, the Board declared a dividend of $0.125 per share that was paid on March 27, 2020 to shareholders of record on March 13, 2020, for an aggregate amount of $0.3 million.

On May 27, 2020, the Board declared a dividend of $0.125 per share that was paid on June 24, 2020 to shareholders of record on June 12, 2020, for an aggregate amount of $0.3 million.

On August 28, 2020, the Board declared a dividend of $0.16 per share that was paid on September 29,2020 to shareholders of record on September 15, 2020, for an aggregate amount of $0.3 million.

NOTE 7: LITIGATION

    Administrative Proceeding

    Mannatech Korea, Ltd. v. Busan Custom Office, Busan District Court, Korea

On or before April 12, 2015, Mannatech Korea, Ltd. filed a suit against the Busan Custom Office (“BCO”) to challenge BCO’s method of calculation regarding its assessment notice issued on July 11, 2013. The assessment notice included
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

an audit of the Company’s imported goods covering fiscal years 2008 through 2012 and required the Company to pay $1.0 million for this assessment, all of which was paid in January 2014. Both parties submitted a response to the Court’s inquiry on January 15, 2016. The final hearing for the case was held on May 26, 2016 where each party presented their respective arguments. The Court set the decision hearing on October 27, 2016, and the Court decided the case in the Company’s favor. However, on November 18, 2016, BCO filed an appeal to the Busan High Court. The first hearing occurred on March 31, 2017, and the second hearing occurred on April 21, 2017. The final hearing was held on June 2, 2017. The Court issued its decision on June 30, 2017 in favor of the BCO. The Company appealed this decision on August 24, 2017. On November 6, 2020, the Company received notice from counsel that the panel of justices assigned to this case conducted discussions on October 30, 2020. This is an indication, although not conclusive, that the Supreme Court may issue a decision by the end of the year or in the first quarter of 2021. This matter remains open.

Litigation - Product Liability

    Meeja Kim, et al., v. Mannatech Korea and Eunbee Cho, Seoul Southern District Court 2020-Gadan-216374
On March 4, 2020, a complaint was filed against Mannatech Korea. Mannatech Korea was served on March 10, 2020. The plaintiffs are the surviving spouse and three children (the “Plaintiffs”) of Kong Seokhwan, a cancer patient who died in October 2017. The Plaintiffs allege that co-defendant and former independent associate, Eunbee Cho, instructed the deceased to take the Company’s products as treatment for cancer. Eunbee Cho was found guilty of fraud and began serving a sentence of one year and six months in November 2019. The Plaintiffs are seeking damages in the amount of 110 million KRW (USD $90,000.00) plus interest of 12% per year. Mannatech Korea has engaged local counsel to defend this matter. An evidentiary hearing was held on October 21, 2020. The next hearing is scheduled for December 9, 2020. It is not possible at this time to predict whether the Company will incur any liability, or to estimate the ranges of damages, if any, which may be incurred in connection with this matter. However, Mannatech Korea believes it has a valid defense and will vigorously defend this claim. This matter remains open.

    Ruiguo Ma v. MTEX Hong Kong Limited and Beili Guan, Case No. 2019-Jin-0116-Civil-2339, Binhai New District Court, Tianjin, China
On or before September 2, 2019, MTEX Hong Kong received service of process of the above-captioned matter. Ruiguo Ma, (the "Plaintiff") is alleging that his child suffered tooth decay after consuming the Company's MannaBears product and underwent several surgeries. The Plaintiff is seeking damages of approximately $50,000 USD. The Company has engaged local counsel to defend this case. The Company has provided notice to its insurance carrier. At this time the potential damages do not meet the deductible; therefore, the case has not been tendered to the carrier. The first hearing occurred on September 11, 2019, and the second hearing occurred on October 30, 2019, where each party presented their respective arguments. On August 25, 2020, the court denied all of the Plaintiff's motions and granted judgment in favor of the MTEX Hong Kong. The Plaintiff appealed the decision on September 21, 2020. MTEX Hong Kong has engaged the same counsel to defend against the appeal. This matter remains open.

Litigation in General

The Company has incurred several claims in the normal course of business. The Company believes such claims can be resolved without any material adverse effect on our consolidated financial position, results of operations, or cash flows.

The Company maintains certain liability insurance; however, certain costs of defending lawsuits are not covered by or only partially covered by its insurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or in part. The Company accrues costs to defend itself from litigation as they are incurred.

    The outcome of litigation is uncertain, and despite management’s views of the merits of any litigation, or the reasonableness of the Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for the contingencies arising from current legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8: LEASES

The Company has entered into contractual lease arrangements to rent office space and equipment from third-party lessors. On January 1, 2019, the Company adopted ASC Topic 842, Leases, ("Topic 842") and related disclosures. See note 5 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019.

    As of September 30, 2020, the Company had net operating lease right-of-use (ROU) assets of $7.0 million and net finance lease right-of-use assets of $0.3 million. At September 30, 2020, our operating lease liabilities were $8.3 million and our finance lease liabilities were $0.2 million.

The weighted-average remaining lease term and discount rate related to the Company’s operating lease liabilities as of September 30, 2020 were 5.56 years and 4.2%, respectively. The weighted-average remaining lease term and discount rate related to the Company’s finance lease liabilities as of September 30, 2020 were 2.92 years and 5.6%, respectively. The Company's lease discount rates are generally based on estimates of its incremental borrowing rate, as discount rates implicit in the Company's leases cannot be readily determined.

    As of September 30, 2020 and 2019 our leased assets and liabilities consisted of the following (in thousands):

LeasesClassificationSeptember 30, 2020September 30, 2019
Right-of-use assets
    Operating leasesOther assets$6,960 $6,410 
    Finance leasesProperty and equipment, net309 383 
Total right-of-use assets$7,269 $6,793 
Current portion of lease liabilities
    Operating leasesAccrued expenses$1,927 $1,929 
    Finance leasesCurrent portion of finance leases77 99 
Long-term portion of lease liabilities
    Operating leasesOther long-term liabilities6,379 5,759 
    Finance leasesFinance leases, excluding current portion152 201 
Total lease liabilities$8,535 $7,988 

As of September 30, 2020 the Company's minimum future lease payments on operating and financing leases were as follows (in thousands):
September 30, 2020
Maturity of lease liabilitiesOperating LeasesFinancing Leases
Remaining 2020$625 $24 
20212,201 91 
20221,737 73 
20231,174 45 
20241,259 21 
2025872 1 
Thereafter1,528  
Total minimum lease payments$9,396 $255 
Imputed interest(1,090)(26)
Present value of minimum lease payments$8,306 $229 
    
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: FAIR VALUE

The Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures.

Fair Value Measurements and Disclosure (Topic 820) of the FASB establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:
Level 1 – Quoted unadjusted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.
Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.
The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. The investment instruments held by the Company are money market funds and interest-bearing deposits for which quoted market prices are readily available. The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company does not have any material financial liabilities that were required to be measured at fair value on a recurring basis at September 30, 2020. 

The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of September 30, 2020 and December 31, 2019.
September 30, 2020Level 1Level 2Level 3Total
Assets    
Money Market Funds – JPMorgan Chase, US$2,345 $ $ $2,345 
Interest bearing deposits – various banks7,019   7,019 
Total assets$9,364 $ $ $9,364 
Amounts included in:    
Cash and cash equivalents$4,850 $ $ $4,850 
Restricted cash679   679 
Long-term restricted cash3,835   3,835 
Total$9,364 $ $ $9,364 

December 31, 2019Level 1Level 2Level 3Total
Assets    
Money Market Funds – Fidelity, US$5,000 $ $ $5,000 
Interest bearing deposits – various banks8,962   8,962 
Total assets$13,962 $ $ $13,962 
Amounts included in:    
Cash and cash equivalents$8,636 $ $ $8,636 
Restricted cash679   679 
Long-term restricted cash4,647   4,647 
Total$13,962 $ $ $13,962 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10: SEGMENT INFORMATION

The Company's sole reporti