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Item 7. Management’s Discussion and Analysis

2021-03-19 compared with 2020-03-26 · 191 added, 114 removed, 381 unchanged (44% of the section changed)

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We currently sell our products in three regions:

(i) the Americas (the United States, Canada, Colombia and Mexico);

(i) the Americas (the United States, Canada and Mexico);

(ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom);

and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).

We conduct our business as a single reporting segment and primarily sell our products through a network of approximately 169,000 active associates and preferred customer positions held by individuals that had purchased our products and/or packs or paid associate fees during the last 12 months, who we refer to as current associates and preferred customers .

We conduct our business as a single reporting segment and primarily sell our products through a network of approximately 183,000 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 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 cross-border e-commerce retail in China.

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 review and analyze net sales by geographical location and by packs and products on a consolidated basis.

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and investment in our infrastructure.

Our subsidiary in China, Meitai, is currently operating under a cross-border e-commerce model.

Our subsidiary in China, Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model.

Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China.

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Our 2020 net sales declined $4.2 million, or 2.7%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.1 million decrease in GAAP net sales as compared to 2019.

In December 2019 , a novel virus began in China with no material impact to our 2019 sales.

Please see Note 16 Subsequent Events for additional information regarding recent developments of this virus.

Our operations outside of the Americas accounted for approximately 69.6% and 66.2% of our consolidated net sales for 2019 and 2018 , respectively.

The net sales comparisons for the year ended December 31, 2019 and December 31, 2018 were primarily affected by decreases in the overall number of active associates and preferred customers.

Associate fees are collected in all markets except Korea and Mexico, where packs are still sold.

Associate fees are paid annually in order for the associate to be entitled to earn commissions, benefits and incentives.

The number of packs sold to, and associate fees paid by, new and continuing independent associates and preferred customers decreased 0.7% during 2019 to approximately 96,000 as compared to 96,700 during 2018 .

In addition, average pack value decreased by $2 , to $24 for the year ended December 31, 2019 , as compared to $26 for the same period in 2018 .

The number of product orders decreased 5.8% during the year ended December 31, 2019 to approximately 841,700 as compared to 893,500 during the same period in 2018 .

The average product order value decreased 3.6% during the year ended December 31, 2019 to $190 , as compared to $197 for the same period in 2018 .

Revenue deferred through the loyalty program decreased 15.1% during the year ended December 31, 2019 as compared to the same period in 2018 .

The net sales comparisons for the year ended December 31, 2020 and December 31, 2019 were primarily affected by foreign currency translation and the worldwide spread of COVID-19.

Excluding the effects due to the translation of foreign currencies into U.S.

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The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2020 and 2019 (in thousands, except percentages) .

2020 2019 Change

net sales Total

net sales Dollar Percentage

Net sales $ 151,407 100.0 % $ 157,728 100.0 % $ (6,321) (4.0) %

Cost of sales 35,505 23.5 % 31,550 20.0 % 3,955 12.5 %

Gross profit 115,902 76.5 % 126,178 80.0 % (10,276) (8.1) %

Operating expenses:

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dollars, including changes in:

Net Sales, Gross Profit, and Income from Operations.

Net Sales, Gross Profit, and Income (loss) from Operations.

We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures.

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Currency impact is determined as the difference between actual growth rates and constant currency growth rates.

Constant $ Change

Non-GAAP Measure:

2020 2019 Constant Dollar Change

Total $ Non-GAAP Measure:

Constant $ GAAP

Total $ Dollar Percent

Net sales $ 151.4 $ 153.5 $ 157.7 $ (4.2) (2.7) %

Product $ 146.2 $ 148.2 $ 154.6 $ (6.4) (4.1) %

Pack and associate fees $ 4.2 $ 4.2 $ 2.3 $ 1.9 82.6 %

Other $ 1.0 $ 1.1 $ 0.8 $ 0.3 37.5 %

Gross profit $ 115.9 $ 117.3 $ 126.2 $ (8.9) (7.1) %

Income (loss) from operations $ 4.5 $ 4.8 $ 6.4 $ (1.6) (25.0) %

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Consolidated net sales by region for the years ended December 31, 2020 and 2019 were as follows (in millions, except percentages) :

Americas $ 44.9 29.7 % $ 48.0 30.4 %

Asia/Pacific 92.1 60.8 % 96.0 60.9 %

EMEA 14.4 9.5 % 13.7 8.7 %

Total $ 151.4 100.0 % $ 157.7 100.0 %

Consolidated domestic and foreign net sales for the years ended December 31, 2020 and 2019 were as follows (in millions, except percentages) :

Domestic $ 33.7 22.3 % $ 36.9 23.4 %

Foreign 117.7 77.7 % 120.8 76.6 %

Total $ 151.4 100.0 % $ 157.7 100.0 %

Overall net sales decreased by $6.3 million, or 4.0%, for 2020, as compared to 2019.

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Sales for the Americas decreased by $3.1 million, or 6.5%, to $44.9 million for 2020 as compared to $48.0 million for the same period in 2019.

This decrease was primarily due to an 18.4% decline in the number of active independent associates and preferred customers partially offset by a 16.5% increase in revenue per active independent associate and preferred customer.

This decrease was primarily due to a 16.5% decline in the number of active independent associates and preferred customers and a 9.7% decrease in revenue per active independent associate and preferred customer.

Foreign currency exchange had the effect of decreasing revenue by $0.3 million for the year ended December 31, 2020, as compared to the same period in 2019.

The currency impact is due to the weakening of the Mexican Peso.

During 2020, Asia/Pacific sales decreased by $3.9 million, or 4.1%, to $92.1 million as compared to $96.0 million for 2019.

This decrease was primarily due to a 9.7% decrease in the number of active independent associates and preferred customers partially offset by a 2.4% increase in revenue per active independent associate and preferred customer.

This decrease was primarily due to a 1.8% decrease in the number of active independent associates and preferred customers and a 6.9% decrease in revenue per active independent associate and preferred customer.

During the year ended December 31, 2020, the loyalty program in Asia/Pacific decreased sales by $0.3 million, as compared to the same period in 2019.

Foreign currency exchange had the effect of decreasing revenue by $0.4 million for the year ended December 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, New Zealand Dollar, Taiwanese Dollar and Singapore Dollar, which was partially offset by the strengthening of the Japanese Yen and Hong Kong Dollar.

The currency impact is primarily due to the weakening of the Korean Won, Australian Dollar, New Zealand Dollar and Singapore Dollar, which was partially offset by the strengthening of the Japanese Yen, Chinese Yuan, Hong Kong Dollar and Taiwanese Dollar.

During 2020, EMEA sales increased by $0.7 million, or 5.1%, to $14.4 million as compared to $13.7 million for 2019.

This increase was primarily due to a 11.5% increase in revenue per active independent associate and preferred customer, which was partially offset by a 2.9% decrease in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of decreasing revenue by $1.2 million when the year ended December 31, 2019 is compared to the same period in 2018 .

The currency impact is primarily due to the weakening of the South African Rand, British Pound, Euro, Norwegian Krone, Swedish Krona and Danish Krone.

This increase was primarily due to an 8.5% increase in the number of active independent associates and preferred customers, which was partially offset by a 16.4% decrease in revenue per active independent associate.

Foreign currency exchange had the effect of decreasing revenue by $1.4 million for the year ended December 31, 2020 as compared to the same period in 2019.

The currency impact is primarily due to the weakening of the South African Rand and Norwegian Krone, which was partially offset by the strengthening of the British Pound, Euro, Swedish Krona and Danish Krone.

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;

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• changes in competitors’ products;

changes in economic conditions, including as a result of COVID-19;

• changes in economic conditions;

• changes in regulations;

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Our sales mix for the years ended December 31, was as follows (in millions, except percentages) :

2020 2019 Dollar Percentage

Consolidated product sales $ 146.2 $ 154.6 $ (8.4) (5.4) %

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Product Sales

Our product sales are made to independent associates and preferred customers at published wholesale prices.

Our product sales are made to our independent associates and preferred customers at published wholesale prices.

Product sales for the year ended December 31, 2020 decreased by $8.4 million, or 5.4%, to $146.2 million, as compared to $154.6 million for the same period in 2019.

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Pack Sales and Associate Fees

The Company collects associate fees in all markets except Korea and Mexico, where packs are still sold.

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.

In the Korea and Mexico markets, packs may still be purchased by our associates who wish to build a Mannatech business.

We do not collect associate fees or sell packs in our non-direct selling business in mainland China.

Packs contain products that are discounted from both the published retail and associate prices.

The Company collected associate fees in lieu of pack sales within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, Taiwan, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, Spain, Sweden and the United Kingdom.

In the Republic of Korea and Mexico, packs may still be purchased by our associates who wish to build a Mannatech business.

These packs contain products that are discounted from both the published retail and associate prices.

There are several pack options available to our associates.

In certain of these markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption.

Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and eligibility for additional commissions and incentives.

In certain of these markets, pack sales are completed during the final stages of the registration process, entitling the Associates to earn commissions, benefits and incentives for that year.

These packs can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption.

Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials.

We also do not collect associate fees or sell packs in our non-direct selling business in mainland China.

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 years ended December 31 ( in millions, except percentages):

Total pack sales and associate fees for the year ended December 31, 2019 decreased by $0.2 million , or 8.0% , to $2.3 million , as compared to $ 2.5 million for the same period in 2018 as the number of packs sold and associate fees collected decreased by 0.7% .

2020 2019 Dollar Percentage

New $ 0.5 $ 0.6 $ (0.1) (16.7) %

Continuing 3.7 1.7 2.0 117.6 %

Total $ 4.2 $ 2.3 $ 1.9 82.6 %

Total pack sales and associate fees for the year ended December 31, 2020 increased by $1.9 million, or 82.6%, to $4.2 million, as compared to $2.3 million for the same period in 2019 as the number of packs sold and associate fees collected increased by 4.3%.

Also, the average pack value for the year ended December 31, 2020 was $45, as compared to $24 for the same period in 2019.

During 2019 and 2018 , we took the following actions in an effort to increase the number of independent associates and preferred customers:

registered our most popular products with the appropriate regulatory agencies in all countries of operations;

During 2020 and continuing into 2021, we took the following actions in an effort to increase the number of independent associates and preferred customers:

• registered our most popular products with the appropriate regulatory agencies in all countries of operations where possible;

• rolled out new products;

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The approximate number of active new and continuing active associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended December 31 was as follows:

New 83,000 45.4 % 81,000 47.9 %

Continuing 100,000 54.6 % 88,000 52.1 %

Total 183,000 100.0 % 169,000 100.0 %

Other sales consisted of:

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(ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications;

and (iii) training and event registration fees.

(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 to support our independent associates, which in turn helps stimulate product sales.

For the year ended December 31, 2019 , other sales decreased by $ 0.1 million , or 11.1% , to $ 0.8 million , as compared to $ 0.9 million for the same period in 2018 .

The decrease was primarily due to the decrease in active new and continuing active associates and preferred customers.

For the year ended December 31, 2020, other sales increased by $0.2 million, or 25.0%, to $1.0 million, as compared to $0.8 million for the same period in 2019.

The increase was primarily due to the increase in active new and continuing active associates and preferred customers.

For the year ended December 31, 2020, gross profit decreased by $10.3 million, or 8.1%, to $115.9 million, as compared to $126.2 million for the same period in 2019.

Gross profit as a percentage of net sales decreased to 76.5% for 2020, as compared to 80.0% for 2019.

The decrease in gross profit percentage was primarily due to increased inventory write-offs.

To motivate our associates to stay engaged in the business amidst the COVID-19 government lockdowns, management introduced value pricing and new products in key markets.

As global supply chains were impacted by the pandemic, our logistics costs rose.

Also, foreign exchange rates primarily related to the declining value of the South African Rand impacted our gross margins.

Commission and Incentives

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Commissions as a percentage of net sales were 38.8% for the year ending December 31, 2020 and 39.1% for the same period in the prior year.

This decrease was primarily due to the elimination of stale vouchers on terminated accounts.

Incentive costs decreased for the year ended December 31, 2019 by 40.9% , or $1.8 million , to $2.6 million as compared to $4.4 million for the same period in 2018 .

The costs of incentives, as a percentage of net sales decreased to 1.6% for the year ended December 31, 2019 , as compared to 2.5% for the same period in 2018 .

This decrease was related to incentives in the Americas and Asia/Pacific.

Reversals of expired commission payment vouchers provided a reduction to our commission expenses of $0.6 million and $1.4 million, in 2020 and 2019, respectively.

Incentive costs increased for the year ended December 31, 2020 by 3.8%, or $0.1 million, to $2.7 million as compared to $2.6 million for the same period in 2019.

The costs of incentives, as a percentage of net sales increased to 1.8% for the year ended December 31, 2020, as compared to 1.6% for the same period in 2019.

This increase was related to incentives in the Americas and Asia/Pacific.

Selling and Administrative Expenses

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For the year ended December 31, 2020, overall selling and administrative expenses decreased by $3.0 million, or 9.7%, to $27.8 million, as compared to $30.8 million for the same period in 2019.

The decrease in selling and administrative expenses consisted of a $2.1 million decrease in marketing costs, of which $1.1 million was a VAT refund that was originally recorded in marketing costs, a $0.6 million decrease in distribution costs, a $0.4 million decrease in stock based compensation expense and a $0.2 million decrease in contract labor costs.

The decrease in selling and administrative expenses consisted of a $2.5 million decrease in payroll costs, a $0.3 million decrease in stock-based compensation and a $0.2 million decrease in contract labor costs.

Other Operating Costs

Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses associated with corporate sponsored events, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.

Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.

For the year ended December 31, 2020, other operating costs decreased by $2.4 million, or 10.4%, to $20.2 million, as compared to $22.6 million for the same period in 2019.

For the year ended December 31, 2020, other operating costs, as a percentage of net sales, were 13.4%, as compared to 14.3% for the same period in 2019.

The decrease was due to a $2.2 million decrease in travel and entertainment costs associated with management's decision to conduct Mannafest as a regional event instead of an international event, a $2.2 million decrease in office expenses due to the corporate office relocation during 2018, a $1.4 million decrease in legal and consulting fees, a $0.5 million decrease in bad debt expense, a $0.4 million decrease in credit card fees and a $0.1 million decrease in charitable contributions.

The decrease was due to a $1.2 million decrease in travel and entertainment costs, a $0.6 million decrease in office expenses, a $0.3 million decrease in legal and consulting fees, and a $0.3 million decrease in credit card fees, sales tax adjustments and other operating costs.

Depreciation and Amortization Expense

For both the years ended December 31, 2019 and 2018 , depreciation and amortization expense was $ 2.1 million .

For the years ended December 31, 2020 and 2019, depreciation and amortization expense was $2.0 million and $2.1 million, respectively.

Other Income (Expense), net

Primarily due to foreign exchange gains, other (expense) income was $(0.7) million and $0.3 million for the years ending December 31, 2019 and 2018 , respectively.

Primarily due to foreign exchange gains, other income (expense) was $1.2 million and $(0.7) million for the years ending December 31, 2020 and 2019, respectively.

Provision for Income Taxes

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Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31:

Country 2020 2019

Australia 30.0 % 30.0 %

Bermuda — % — %

Canada 26.5 % 26.5 %

Colombia 32.0 % 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 % 34.6 %

Mexico 30.0 % 30.0 %

Norway 22.0 % 22.0 %

Republic of Korea 22.0 % 22.0 %

20.0 % 20.0 %

Singapore 17.0 % 17.0 %

South Africa 28.0 % 28.0 %

Sweden 21.4 % 21.4 %

Switzerland (3)

Taiwan 20.0 % 20.0 %

18.0 % 18.0 %

United Kingdom 19.0 % 19.0 %

United States 21.0 % 21.0 %

(1) For 2020, the Company qualified for a reduced 5% tax rate in China as a Small Low Profit Enterprise.

(2) On August 1, 2016, the Company established a legal entity in Russia called Mannatech RUS Ltd., but currently does not operate in Russia.

(2) On July 1, 2019, the Company suspended operations in Switzerland, but maintains the legal entity.

(3) On July 1, 2019, the Company suspended active operations in Switzerland, but maintains the legal entity.

(4) On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity, Mannatech Ukraine LLC.

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Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States.

On December 22, 2017, President Trump signed into law H.R.

1/Public Law No.

115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Pursuant to ASC 740-10-25-47, the effects of the new federal legislation are recognized upon enactment, which is the date the president signs a bill into law.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“TCJA”) (“SAB 118”), which provides guidance on accounting for the impact of the Act, in effect allowing an entity to use a methodology similar to the measurement period in a business combination.

Pursuant to the disclosure provisions of SAB 118, as of September 30, 2018, the Company had completed its accounting for the tax effects of the Act.

In Financial Accounting Standards Board (“FASB”) staff Q&A Topic 740, No.

5, Accounting for Global Intangible Low-Taxed Income, the FASB staff noted that ASC 740, Income Taxes (“Topic 740”), was not clear with respect to the appropriate accounting for Global Intangible Low-Taxed Income ("GILTI"), and accordingly, an entity may either:

(1) elect to treat taxes on GILTI as period costs similar to special deductions, or (2) recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal (the deferred method).

The Company will account for GILTI in the year the tax is incurred as a period cost.

We use the recognition and measurement provisions of 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.

As of December 31, 2019 and 2018, we adjusted our valuation allowance for deferred tax assets in the following table (in millions) , as we believe the “ more likely than not ” criterion for recognition and realization purposes, as defined in Topic 740, cannot be met.

valuation allowance decreased due to the utilization of net operating losses in the current year.

For the years ended December 31, 2020 and 2019, the Company’s effective tax rate was (9.4)% and 42.5%, respectively.

In 2020, the Company had a significant decrease in its rate due to the carryback of U.S.

net operating losses as allowed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020.

In 2019, the Company had a higher effective rate due to its mix of earnings across jurisdictions and valuation allowance recorded on certain losses.

At December 31, 2020 and 2019, the Company’s valuation allowance was $11.9 million and $12.4 million, respectively.

The provisions of Accounting Standards Codification Topic 740, Income Taxes (“ASC Topic 740”) require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met.

A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset.

Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowance against the Company’s deferred tax assets consisted of the following at December 31 (in thousands) :

Country 2020 2019

Australia $ 0.2 $ 0.2

China 0.4 0.3

Colombia 0.6 0.6

Mexico 3.1 3.3

Norway 0.1 0.1

South Africa 0.2 0.2

Switzerland 0.5 0.5

Taiwan 1.1 1.0

Ukraine — 0.1

United Kingdom — 0.1

United States 5.5 6.0

Other Jurisdictions

For the years ended December 31, 2019 and 2018, the Company’s effective tax rate was 42.5% and 894.7% , respectively.

In 2019, the Company had a significant decrease in its rate due to the mix of earnings across jurisdictions.

For 2018, the Company had a significant increase in its rate due to the mix of earnings across jurisdictions, valuation allowance recorded on losses in certain jurisdictions, and the impact of GILTI as a result of the TCJA passed in 2017.

Total $ 11.9 $ 12.4

We believe the impact of seasonality on our consolidated results of operations is minimal.

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Cash and Cash Equivalents

As of December 31, 2019 , our cash, cash equivalents and restricted cash increased by 1.4% , or $0.4 million , to $31.0 million from $30.6 million as of December 31, 2018 .

As of December 31, 2020, our cash, cash equivalents and restricted cash decreased by 11.3%, or $3.5 million, to $27.5 million from $31.0 million as of December 31, 2019.

The Company is required to restrict cash for (i) direct selling insurance premiums and credit card sales in the Republic of Korea;

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and (iii) Australia building lease collateral.

The current portion of restricted cash at December 31, 2019 and 2018 was $0.9 million and $1.5 million , respectively.

Fluctuations in currency rates produced a decrease of $0.6 million in cash and cash equivalents in 2019 as compared to an increase of $1.6 million in 2018 .

The current portion of restricted cash at each of December 31, 2020 and 2019 was $0.9 million.

Fluctuations in currency rates produced an increase of $1.3 million in cash and cash equivalents in 2020 as compared to a decrease of $0.6 million in 2019.

Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends.

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Working capital represents total current assets less total current liabilities.

At December 31, 2019 , our working capital increased by $ 3.3 million , or 37.5% , to $12.1 million from $8.8 million at December 31, 2018 .

The increase in working capital is primarily due to decreases in accounts payable.

At December 31, 2020, our working capital decreased by $1.6 million, or 13.2%, to $10.5 million from $12.1 million at December 31, 2019.

The decrease in working capital is primarily due to increases in accounts payable.

Net Cash Flows

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Cash provided by operating activities increased by $1.1 million for the year ended December 31, 2020, as compared to the same period in 2019.

For the year ended December 31, 2019, sources of cash include our profits and working capital management.

For the year ended December 31, 2020, sources of cash include our profits, working capital management, and a $1.2 million tax refund as we amended returns as allowed by the CARES Act.

Investing Activities

For the year ended December 31, 2020, our investing activities used cash of $0.9 million, as compared to cash used of $1.2 million for the same period of 2019.

During the year ended December 31, 2019, we invested $0.8 million in computer hardware and software and $0.4 million for leasehold improvements in various international offices and training centers.

During the year ended December 31, 2018, we invested $2.2 million in computer hardware and software, $1.9 million in leasehold improvements and $0.5 million in office furniture and equipment as we moved our corporate headquarters to a new building.

Of this $4.6 million investment, $2.3 million was funded from a capital financing agreement.

During the year ended December 31, 2020, we invested $0.9 million in computer hardware and software.

During the year ended December 31, 2019, we invested $0.8 million in computer hardware and software, $0.4 million in leasehold improvements in various international offices and training centers.

Financing Activities

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For the year ended December 31, 2020, we used approximately $0.6 million in the repayment of finance lease obligations and other long term liabilities, $3.4 million in the payment of dividends to shareholders, and $5.9 million in the repurchase of common stock.

For the year ended December 31, 2018 , we used cash of approximately $1.5 million to repay capital lease obligations, $3.1 million for payment of dividends to shareholders, and $7.5 million for the repurchase of common stock, which was partially offset by cash provided by the exercise of stock options.

For the year ended December 31, 2019, we used cash of approximately $1.2 million to repay finance lease obligations, $1.2 million for payment of dividends to shareholders, and $0.3 million for the repurchase of common stock, which was partially offset by cash provided by the exercise of stock options.

General Liquidity and Cash Flows

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Additionally, COVID-19 could adversely impact our workforce, supply chain or demand for our products and therefore, our liquidity in the next twelve months, however, such impact is currently unknown.

For more information, see Note 7 Income Taxes , Note 12 Litigation and Note 16 Subsequent Events to our Consolidated Financial Statements.

For more information see Note 1 Organization and Summary of Significant Accounting Policies, Note 7 Income Taxes, and Note 12 Litigation to our Consolidated Financial Statements.

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 took 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.

On 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 CARES Act and was administered by 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.

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 experienced shortages of raw materials and ingredients.

We experienced challenges in getting materials and ingredients to our contract manufacturers and finished products to our distribution centers as a result of reductions in global transportation capacity.

Despite the impact on the global supply chain, the Company has overcome 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 negatively impacted our sales in fiscal year 2020 and may continue to negatively impact sales in fiscal year 2021 as well as the Company’s overall liquidity.

Long Term Liquidity

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The following summarizes our future commitments and obligations associated with various agreements and contracts as of December 31, 2020, for the years ending December 31 (in thousands) :

2021 2022 2023 2024 2025 Thereafter Total

Finance lease obligations $ 98 $ 75 $ 45 $ 21 $ 1 $ — $ 240

Purchase obligations (1)(2)(3)

Operating leases

5,175 2,617 — — — — 7,792

Operating leases obligations (4)

2,644 1,930 1,217 1,308 892 1,528 9,519

Note payable and other financing arrangements 449 — — — — — 449

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Tax liability (5)

— — — — — 202 202

Other obligations (6)

233 191 25 126 36 657 1,268

Total commitments and obligations $ 9,046 $ 4,813 $ 1,287 $ 1,455 $ 929 $ 2,387 $ 19,917

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(2) Excludes approximately $18.0 million of finished product purchase orders that may be canceled or with delivery dates that have changed as of December 31, 2020.

(3) Represents the tax liability associated with uncertain tax positions, see Note 7 to our Consolidated Financial Statements, Income Taxes to our consolidated financial statements.

(3) A raw materials supplier agreement changed from a 2 year auto-renew to 1 year and extended until November 2021.

(4) Represents the minimum future payments, including imputed interest, for operating leases within the scope of Accounting Standards Codification Topic 842, Leases .

Of the total present value of lease liabilities, $2.1 million was recorded in "Accrued expenses" and $6.1 million was recorded in "Other long-term liabilities".

See Note 5 to our Consolidated Financial Statements, Leases .

(5) Represents the tax liability associated with uncertain tax positions, see Note 7 to our Consolidated Financial Statements, Income Taxes .

(6) Other obligations are composed of pension obligations related to the Company's international operations (approximately $1 million) and lease restoration obligations (approximately $0.3 million).

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Please see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about our Market Risks.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP.

The application of GAAP requires us to make estimates and assumptions that affect the reported values of assets and liabilities at the date of our financial statements, the reported amounts of revenues and expenses during the reporting period, and the related disclosures of contingent assets and liabilities.

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As of December 31, 2020, the estimated useful lives and net carrying values of fixed assets are as follows:

Estimated useful life

Net carrying value at December 31, 2019

Office furniture and equipment

Computer hardware and software

Leasehold improvements (1)

2 to 10 years

Total net carrying value at December 31, 2019

(1) We amortize leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term.

Estimated useful life Net carrying value at December 31, 2020

Office furniture and equipment 5 to 7 years $0.8 million

Computer hardware and software 3 to 5 years 2.0 million

Automobiles 3 to 5 years 0.1 million

Leasehold improvements 2 to 10 years 1.6 million

Total net carrying value at December 31, 2020 $4.5 million

The net carrying costs of fixed assets and construction in progress 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 material impairments existed during the year ended December 31, 2019 .

During the year ended December 31, 2018 , no material impairments existed.

Based on management’s analysis, no material impairments existed during the years ended December 31, 2020 and 2019.

Uncertain Income Tax Positions and Tax Valuation Allowances

As of December 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 FASB ASC Topic 740, Income Taxes, we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions.

As required by ASC Topic 740, Income Taxes (“ASC 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.

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As of December 31, 2020, we maintained a valuation allowance for deferred tax assets arising from our operations of $11.9 million because they did not meet the “more likely than not” criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes.

In addition, as of December 31, 2019 , we had net deferred tax assets, after valuation allowance, totaling $0.9 million , which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution.

In addition, as of December 31, 2020, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling $1.2 million, which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution.

In February 2018, the FASB issued Accounting Standards Update ("ASU") No.

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The adoption of this standard had no impact on our consolidated financial statements.

Transfer Pricing

In many countries, including the U.S., we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our U.S.

and foreign entities and are taxed accordingly.

In the normal course of business, we are audited by federal, state and foreign tax authorities, and subject to inquiries from those tax authorities regarding the amount of taxes due.

These inquiries may relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions.

We believe that our tax positions comply with applicable tax law and intend to defend our positions, if necessary.

Our effective tax rate in each financial statement period could be impacted if we prevailed in matters for which reserves have been established, or were required to pay amounts more than established reserves.

Revenue Recognition

Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter and renewal 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.

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.

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.

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.

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The Company provides associates with access to a complimentary three-month package for the Success Tracker TM 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 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.

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Our 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 timing and recognition of loyalty points has not changed with the adoption of ASC 606.

The timing and recognition of loyalty points has not changed with the adoption of ASC 606, Revenue from Contracts with Customers (“ASC Topic 606”).

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.

There have not been significant changes for the breakage estimate as a result of adopting ASC 606.

There have not been significant changes for the breakage estimate as a result of adopting ASC Topic 606.

The deferred revenue associated with the loyalty program at December 31, 2020 and December 31, 2019 was $4.5 million and $3.1 million, respectively.

Loyalty program

(in thousands)

Loyalty program (in thousands)

Loyalty deferred revenue as of January 1, 2019 $ 4,231

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Product Return Policy

We stand behind our packs and products and believe we offer a reasonable and industry-standard product return policy to all of our customers.

We stand behind our products and believe we offer a reasonable and industry-standard product return policy to all of our customers.

We do not resell returned products.

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This policy allows a retail customer to return any of our products to the original associate who sold the product and receive a full cash refund from the associate for the first 180 days following the product’s purchase if located in the United States and Canada, and for the first 90 days following the product’s purchase in other countries where we sell our products.

The associate may return or exchange the product based on the associate product return policy.

In China, where we sell our products under a cross-border e-commerce model, we have a 14-day return policy.

The associate may then return or exchange the product based on the associate product return policy.

• Associate and Preferred Customer Product Return Policy.

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If we discover abuse of the refund policy, we may terminate the associate's or preferred customer’s account.

The Company utilizes the expected value method, as set forth by 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 utilizes the expected value method, as set forth by ASC Topic 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.

The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC 606.

The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC Topic 606.

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.

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For the year ended December 31, 2020, our assumptions and estimates used for the calculated fair value of stock options granted in 2020 were as follows:

2020 Grants June

Estimated fair value per share of options granted:

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For example, if actual employee forfeitures significantly differ from our estimated forfeitures, we may be required to adjust our consolidated financial statements in future periods.

As of December 31, 2019 , using our current assumptions and estimates, we anticipate recognizing $0.1 million in gross compensation expense through 2020 related to unvested stock options outstanding.

As of December 31, 2020, using our current assumptions and estimates, we anticipate recognizing less than $0.1 million in gross compensation expense through 2021 related to unvested stock options outstanding.

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.

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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.

The legal reserve would include an estimated amount for any damages and the probability of losing any threatened legal claims or assessments.

No legal reserve was deemed necessary at December 31, 2020.

The legal reserve is developed in consultation with our general and outside counsel and is based upon a combination of litigation and settlement strategies.

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Different components of the guidance require modified retrospective or prospective adoption.

ASU 2019-10 deferred the effective date of ASU 2016-13 for all entities except SEC filers that are not smaller reporting companies.

ASU 2019-10 deferred the effective date of ASU 2016-13 for smaller reporting companies.

This standard will be effective for us 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.

Under ASC Topic 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis