Our Mission and Vision
2012
AN NUAL REPO R T
To the Shareholders,
2012 began with a strong commitment to restore profitability, generate positive cash flow and hone initiatives to drive top-line growth. Continuing our
strategy of growth through global expansion, Hong Kong and Ukraine are expected to launch this year. We feel that these two markets, along with the
improvements in our existing key global markets, give us an opportunity to reverse our revenue trends.
To generate organic growth, we began the launch of NutriVerus™ powder in May 2012. The roll-out of this new product reached almost all of our countries
of operation by the end of 2012, quickly rising into our top five best-selling products. NutriVerus provides consumers with a single, affordable and easy-to-
use powder containing efficacious amounts of glyconutrients, antioxidants, vitamins and minerals produced from real-food sources for less than $2 per day.
Additionally, we launched the 4Free Discount program that allows customers to earn a 25% discount on their qualifying purchases. We believe these two
programs produced dramatic results as our independent associates acquired new consumers at rates exceeding those from prior years. Although these
efforts did not immediately increase sales volume, they did increase the number of new members and independent associates, being the first annual
growth since 2009.
The Company returned to profitability for the second half of 2012. This was accomplished through the continued improvement of our operational business
model, rigid cost controls and reduction in expenses throughout our international markets.
Finally, we are continuing to focus on leveraging the renewed energy of our existing independent associates to implement the new programs and products
that could propel our business forward, maintaining profitability throughout the year.
We are excited about our prospects in 2013. We thank you for your continuing support of Mannatech.
J. Stanley Fredrick
Chairman of the Board
Dr. Rob Sinnott
CEO and Chief Science Officer
for the year ended december 31
(in millions, except per share information and ratios)
Results of opeRations
Net sales
Gross profit
Loss before income taxes
Net loss
loss peR shaRe:
Basic
Diluted
Weighted-average common shares outstanding (in thousands):
Basic
Diluted
financial condition:
Total cash
Total working capital
Total assets
Total shareholders’ equity
Cash flows from operations
statistics:
Current ratio
Inventory turnover ratio
Debt-to-equity ratio
Dividends paid per share
2012
$173
$139
$(0.3)
$(1)
$(0.52)
$(0.52)
2,648
2,648
$14
$11
$48
$20
$(1)
1.5
2.1
0.15
—
2011
$201
$162
$(18)
$(21)
$(7.80)
$(7.80)
2,649
2,649
$18
$12
$58
$22
$(3)
1.4
1.8
0.31
—
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
For the fiscal year ended December 31, 2012
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
(State or other Jurisdiction of Incorporation or Organization)
75-2508900
(I.R.S. Employer Identification No.)
600 S. Royal Lane, Suite 200, Coppell, Texas
(Address of Principal Executive Offices)
75019
(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 class
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
The Nasdaq Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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 [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
At June 30, 2012, the aggregate market value of the common stock held by non-affiliates of the Registrant was $11,876,206 based on the closing sale
price of $6.99, as reported on the NASDAQ Global Select Market.
The number of shares of the Registrant’s common stock outstanding as of March 22, 2013 was 2,647,735 shares.
Documents Incorporated by Reference
Mannatech, Incorporated incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to its
definitive proxy statement for its 2013 annual shareholders’ meeting to be filed pursuant to Regulation 14A no later than 120 days after the end of its
fiscal year.
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Signatures
Part IV
Page
1
2
21
32
32
32
33
34
34
35
51
52
52
52
54
54
54
54
54
54
54
55
Special Note Regarding Forward-Looking Statements
Certain disclosures and analysis in this Form 10-K, 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 and in the
“Risk Factors” section in Item 1A of this Form 10-K, and elsewhere in this Form 10-K 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:
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;
the ability to attract and retain independent associates and members;
new regulatory changes that may affect operations or products;
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.
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,”
“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,” “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
Item 1. Business
Overview
PART I
Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993.
We develop and sell innovative, high quality, proprietary nutritional supplements, topical and skin care products, and weight-
management products that target optimal health and wellness. We currently sell our products in three regions: (i) North
America (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,
Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore and
Taiwan). In November 2012, the Company commenced the shipment of its products to the Ukraine and in December 2012,
the Company commenced the shipment of its products to Hong Kong. The Company is currently pursuing the prospect of
launching formal operations in the Hong Kong and the Ukraine markets in 2013. We conduct our business as a single
operating segment and primarily sell our products and packs through a network of independent associates and members. As
of December 31, 2012, we had approximately 229,000 active independent associates and members who had purchased our
products and packs within the last 12 months.
We sell our products through network marketing, which we believe is the most cost-effective way to quickly and
effectively introduce our products and communicate information about our business to the global marketplace. Network
marketing minimizes upfront costs, as compared to conventional marketing methods, and allows us to be more responsive to
the ever-changing overall market conditions, as well as continue to research and develop high quality products and focus on
controlled successful international expansion. We believe the network marketing channel also allows us to effectively
communicate the potential benefits and unique properties of our proprietary products to our consumers. In addition, network
marketing provides our business-building independent associates with an avenue to supplement their income and develop
financial freedom by building their own business centered on our business philosophies and unique products.
Our common stock is currently traded on the NASDAQ Global Select Market (“Nasdaq”) under the symbol
“MTEX”. Information for each of our two most recent fiscal years, with respect to our net sales, results of operations, and
identifiable assets is set forth in the Consolidated Financial Statements of this report.
Available Information
We make available free of charge on our Internet website (https://www.mannatech.com) our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and certain other information filed or furnished
with the Securities and Exchange Commission (the “SEC”) as soon as reasonably practicable after electronically filing or
furnishing such material. The SEC maintains a website that contains reports, proxy and information statements, and other
information regarding issuers, including Mannatech, that electronically file with the SEC at http://www.sec.gov.
Additionally, such materials are available in print upon the written request of any shareholder to our principle executive
office located at 600 S. Royal Lane, Suite 200, Coppell, Texas 75019, Attention: Investor Relations, or by contacting our
investor relations department at (972) 471-6512 or IR@mannatech.com.
Business Segment, Products and Product Development
Business Segment. We conduct our business as a single operating segment – primarily through sales of nutritional
supplements, topical and skin care products, and weight management products through network marketing distribution
channels in twenty-two countries. For more information with respect to the financial results and conditions of our business
segment, including financial information about geographic areas, see Note 16 to our consolidated financial statements.
Products. Scientists have discovered that a healthy body consists of many sophisticated components working in
harmony to achieve optimal health and wellness and requires cellular communication to function at an optimal level. In its
most basic form, a body’s internal communication occurs at the cellular level, and is referred to as cell-to-cell
communication. Scientists also discovered that there are more than 200 monosaccharides, also called sugar molecules, which
form naturally. Specific monosaccharides are considered vital components for cellular communication in the human body.
Furthermore, scientists discovered that these monosaccharides attach themselves to certain proteins, which then form a
molecule called glycoprotein. Harper’s Biochemistry, a leading and nationally recognized biochemistry reference, has
recognized that these molecules are found in human glycoproteins, and are believed to be essential in helping to promote and
provide effective cell-to-cell communication in the human body.
2
The history of our proprietary ingredients and products is as follows:
In 1994, we developed and began selling our first products containing Manapol® powder, an ingredient
formulated to support cell-to-cell communication.
In 1996, we enhanced our products based on the study of glycoproteins and our scientists developed our own
proprietary compound, Ambrotose® complex, which we patented. Our Ambrotose® complex is a blend of
polysaccharides (composed of monosaccharides) that helps provide support for the immune system.
In 2001, we broadened our proprietary ingredients by developing the Ambroglycin® blend, a balanced food-
mineral matrix which helps deliver nutrients to the body and which is used in our proprietary Catalyst™ and
Glycentials® vitamin/mineral supplements.
In 2004, we introduced our proprietary blend of antioxidant nutrients, MTech AO Blend® ingredient, which is
used in our proprietary antioxidant Ambrotose AO® product.
In 2006, we introduced a unique blend of plant-based minerals, natural vitamins, and standardized
phytochemicals for use in our proprietary PhytoMatrix® product. We also introduced a compound used in
reformulated Advanced Ambrotose® complex. This compound allows a more potent concentration of the full
range of mannose-containing polysaccharides occurring naturally in aloe to be produced in a stable powdered
form.
In 2007, we introduced into the United States market our skin care line of products that supports skin’s natural
texture, beauty, and elasticity. We also launched our PhytoMatrix® caplets, Advanced Ambrotose® capsules and
Manna•Bears™ supplement into international markets.
In 2008, we introduced a proprietary proteolytic enzyme and phytosterol dietary supplement that supports the
body’s natural recovery processes associated with physical activity in our BounceBack™ capsules. We also
introduced a proprietary version of whey protein peptide technology that assists targeted fat loss when
combined with exercise and a healthy diet in our OsoLean™ powder.
In 2009, we introduced our Omega-3, which features EPA/DHA essential acids, PhytoBurst™ Nutritional
Chews formulated with vitamins, minerals, and phytonutrients from food-sourced ingredients, and GI-
ProBalance™ Slimstick in Korea, which is a synbiotic digestive product containing probiotics, prebiotics, and
digestive enzymes. In addition, we improved our Ambrotose® products to include beta-Carotene.
In 2010, we launched our Mannatech LIFT™ Skin Care System, which is paraben-free and formulated to give
skin a more natural youthful appearance.
In 2011, we introduced our reformulated version of our Omega-3 supplement, which now includes Vitamin D3
and features EPA/DHA essential acids. We also introduced GI-ProBalance™ Slimstick in North America and
expanded several previously launched products from our domestic line to our international markets.
In 2012, we launched our NutriVerus™ powder, a single product that features all of our core scientific
technologies at a very affordable price. This unique, ground-breaking product combines our core glyconutrient
technologies with vitamins, minerals, antioxidants and stabilized rice bran, all based on Real Food Technology
solutions. This product was introduced in all our markets during 2012 except in South Africa where it is
expected to be introduced in Spring 2013.
Mannatech offers products based on Real Food Technology solutions, an approach that offers standardized amounts
of nutrients sourced from real foods and plants.We focus on producing products that are from all-natural sources, with no
synthetic or chemically derived additives. There are three major categories of our products:
Health, which offers a variety of nutritional supplements that aid in optimizing overall health and wellness. This
category includes a variety of daily nutritional supplements, health solutions for children, and additional
nutrients designed to help keep specific body systems at optimal levels.
Weight and Fitness, which offers products designed to curb appetite and burn fat, build lean muscle tissue, and
support recovery from overexertion.
Skin Care, which offers several products that are formulated with more than 30 botanical ingredients, contain our
Jeunesse 7™ proprietary blend – a unique combination of montmorillonite and glyconutrients, and are designed
to give the skin a more natural youthful appearance by moisturizing, hydrating and reducing the appearance of
fine lines and wrinkles.
3
The following table summarizes our products by category:
Product Category
Representative Products
Health
Weight and Fitness
Skin Care
Ambrotose® complex, Ambrotose AO®, Advanced
Ambrotose®, PhytoMatrix®, Glyco-Bears®, MannaBears™,
Catalyst™, PLUS™, Manna-C™, CardioBALANCE®,
ImmunoSTART®, BounceBack®, MannaCLEANSE™,
PhytAloe®, GI-Pro®, GI-Zyme®, Omega-3 with Vitamin
D3, PhytoBurst™ Nutritional Chews, NutriVerus™,
Optimal Support Packets, and GI Pro Balance™ Slimstick.
OsoLean™, Accelerator3™, FiberSlim®, GlycoSlim®,
AmbroStart®, SPORT™, and EM·PACT®.
Emprizone®, FIRM with Ambrotose®, LIFT™ Exfoliating
Facial Cleanser, LIFT™ Multiphase Serum, LIFT™ Day
Moisturizer, LIFT™ Night Repair Crème, and LIFT™
Body Lotion.
A significant portion of our revenue is derived from our core Ambrotose® complex products which include the
Ambrotose® products and Advanced Ambrotose® products. Revenue from the core Ambrotose® products were as follows for
the years ended December 31, 2012 and 2011 (in thousands, except percentages):
Advanced Ambrotose®
Ambrotose®
Total
2012
2011
Sales by
product
66,280
12,143
78,423
$
$
% of total
net sales
38.2 % $
7.0 %
Sales by
product
66,893
15,513
45.2 % $
82,406
% of total
net sales
33.3 %
7.7 %
41.0 %
Product Development. Our product committee continues to focus on potential new products and compounds that
help target or promote overall health and wellness. When considering new products and compounds, our product committee
considers the following criteria:
marketability and proprietary nature of the product;
demand for the product;
competitors’ products;
regulatory considerations;
availability of ingredients; and
data supporting claims of efficacy and safety.
To maintain a flexible operating strategy and the ability to increase production capacity, we contract with third-
parties to manufacture all of our products, which allows us to effectively respond to fluctuations in demand with minimal
investment and helps control our operating costs. We believe our suppliers and manufacturers are capable of meeting our
current and projected inventory requirements over the next several years. However, as a safety measure, we continue to
identify and approve alternative suppliers and manufacturers to ensure that our global demands are met in a timely manner
and to help minimize any risk of business interruption.
Industry Overview
Nutrition Industry
We operate in the nutritional supplement industry and distribute and sell our products through our own global
network marketing channel. The nutritional supplement industry is fast-paced, highly fragmented, and intensely competitive.
It includes companies that manufacture and distribute products that are intended to enhance the body’s performance and
well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals, and compounds
4
derived therefrom. Prior to 1990, all dietary supplements in the United States were tightly regulated by the FDA and only
included essential nutrients such as vitamins, minerals, and proteins. In 1990, the Nutrition Labeling and Education Act
expanded the category to include “herbs or similar nutritional substances”, but the FDA maintained control over pre-market
approval. However, in 1994, the Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was passed in the
United States, drastically changing the dietary supplement marketplace. The DSHEA was instrumental in expanding the
category of dietary supplements to further include herbal and botanical supplements and ingredients such as ginseng, fish
oils, enzymes, and various mixtures of these ingredients. Under DSHEA, vendors of dietary supplements are now able to
educate consumers regarding the effects of certain component ingredients.
Nutritional supplements are available through mass-market retailers, drug stores, supermarkets, discount stores,
health food stores, mail order companies, and direct sales organizations. Direct selling, of which network marketing is a
significant segment, has grown significantly and has been enhanced in the past decade as a distribution channel due to
advancements in technology and communications resulting in improved product distribution and faster dissemination of
information.
Direct Selling/Network Marketing Channel
Since the 1990s, the direct selling and network marketing sales channel has grown in popularity and general
acceptance, including acceptance by prominent investors and capital investment groups who have invested in direct selling
companies. This has provided direct selling companies with additional recognition and credibility in the growing global
marketplace. In addition, many large corporations have diversified their marketing strategy by entering the direct selling
arena. Several consumer-product companies have launched their own direct selling businesses with international operations
often accounting for the majority of their revenues. Consumers and investors are beginning to realize that direct selling
provides unique opportunities and a competitive advantage in today’s markets. Businesses are able to quickly communicate
and develop strong relationships with their customers, bypass expensive ad campaigns, and introduce products and services
that would otherwise be difficult to promote through traditional distribution channels such as retail stores. Direct selling is a
channel of distribution with healthy cash flow, high return on invested capital, and long-term prospects for global expansion.
According to the worldwide direct sales data published by the World Federation of Direct Selling Association, in 2011
approximately 92 million global direct sellers collectively generated annual retail sales of $153.7 billion.
Operating Strengths
1. High-Quality, Innovative, Proprietary Products. We base our product concept on the scientific belief that certain
glyconutrients, also known as monosaccharides or sugar molecules, are essential for maintaining a healthy immune
system. We believe the addition of effective nutritional supplements to a well-balanced diet, coupled with an
effective exercise program, will enhance and help maintain optimal health and wellness. We focus on producing
products that are from all-natural sources with no synthetic or chemically derived additives. We formulate our
products with predominately naturally-occurring, plant-derived, carbohydrate-based, safe ingredients that are
designed to use nutrients working through normal physiology to help achieve and maintain optimal health and
wellness, rather than developing common synthetic, carbohydrate-based products.
We believe that our patented proprietary blend, Ambrotose® complex, included in many of our products
distinguishes us as a leader in the global nutritional supplements industry and that no other combination of vitamins,
minerals, amino acids, or herbals can provide the benefits found in Ambrotose® complex. We also believe the use of
unique compounds found in our products allows us to effectively differentiate and distinguish our products from
those of our competitors.
2. Research and Development Efforts. We are steadfast in our commitment to quality-driven research and
development. We use systematic processes for the research and development of our unique proprietary product
formulas, as well as the identification of quality suppliers and manufacturers. Our research and quality assurance
programs are outlined on our corporate websites www.mannatechscience.org, www.mannatech.com, and
www.allaboutmannatech.com.
Dr. Robert Sinnott, our CEO and Chief Science Officer, leads our team of experienced researchers and
scientists. This team continually reviews the latest published research data, attends scientific conferences, and draws
upon its vast knowledge and expertise to develop new products and support existing ones. In addition, this team
works in collaboration with other research firms, universities, institutes, and scientists. Our products have been the
focus of numerous pre-clinical and clinical studies.
5
To support our research and development efforts, we have strategic alliances with our suppliers,
consultants, and manufacturers that allow us to effectively identify and develop high-quality, innovative, proprietary
products that increase our competitive advantage in the marketplace.
These efforts include developing and maintaining quality standards, supporting development efforts for
new ingredients and compounds, and improving or enhancing existing products or ingredients. In addition, our
research and development team identifies other quality-driven suppliers and manufacturers for both our global and
regional needs.
Research and development costs related to new product development, enhancement of existing products,
clinical studies and trials, FDA compliance studies, general supplies, internal salaries, third-party contractors, and
consulting fees were approximately $1.9 million and $3.0 million for the years ended December 31, 2012 and 2011,
respectively.
3. Quality Assurance Program. Mannatech uses only qualified manufacturing contractors to produce, test, and
package our finished products. These contractors must be compliant and current with required certifications and
they must strictly adhere to our own quality standards for all markets. Certifications and guidelines that our contract
manufacturers are required to carry and/or follow include:
the FDA’s current Good Manufacturing Practices for manufacturing, packaging, labeling, and holding
of dietary supplements;
the FDA’s Good Manufacturing Practices for human food;
the requirements of the Natural Health Products Directorate of Canada;
the Korean Food and Drug Administration;
certification by the Therapeutic Goods Administration of Australia, when necessary;
the European Union’s Food Supplement Directive and Nutrition and Health Claims Regulations, as
well as individual member state legislation;
the Taiwan Food and Drug Administration;
the Japan Ministry of Health Labor and Welfare;
the Singapore Health Sciences Authority; and
the South African Department of Health and Medicines Control Council.
We have an established quality assurance program designed to ensure our manufacturers’ compliance with
these certifications and guidelines, and to ensure that proper controls are maintained during the manufacturing,
evaluation, packaging, storage, and distribution of our products. These controls include a comprehensive supplier
audit and surveillance program, third-party certifications, and continuous product monitoring.
A team of professionals, many of whom have extensive experience in the pharmaceutical industry, leads
our in-house quality assurance program and continually monitors the quality of our products, including the
production process. In addition, they work with suppliers and manufacturers to develop quality standards for raw
material components and products, and perform tests and inspections to ensure that finished products are safe and of
high quality prior to release.
We require our dietary supplements to be packaged with seals to help minimize the risk of tampering. We
also perform stability studies under both controlled ambient and accelerated temperature storage conditions to
ensure label claims throughout the shelf life of our products.
To further ensure product quality, we seek qualified independent organizations to conduct further product
testing. To date, numerous products have been tested, and:
nine products are certified according to the NSF/ANSI 173 Dietary Supplement Standard—the only
American National Standard for dietary supplements. This certification ensures that this product
6
contains only the ingredients indicated on the label and is free of impurities, and that Good
Manufacturing Practices were used in the manufacturing facility;
ten products are certified Kosher by OU Kosher, the trademark with the highest certification standards
worldwide; and
twenty-six products have been tested and confirmed to be gluten-free by Covance Laboratories.
4. High-Caliber, Industry-Leading Independent Associates. Our global team of independent associates is comprised
of dedicated, hard-working, high-caliber individuals, many of whom have been associated with the network
marketing industry for decades and have been loyal to us since our beginning in 1993. To capitalize on their wealth
of knowledge and experience, we sponsor a panel of independent associates, called the “North American Associate
Advisory Council” (the “Advisory Council”), which help identify and effectively relay the needs of our independent
business-building associates to us. The members of the Advisory Council are elected by their peers and serve a
three-year term. The Advisory Council meets periodically with our team of senior management to recommend
changes, discuss issues, and provide new ideas or concepts, including a full spectrum of innovative ideas for
additional quality-driven nutritional supplements aimed at maintaining optimal health and wellness.
5. Support Philosophy for Our Independent Associates and Members. We are fully committed to providing the
highest level of support services to our independent associates and members and believe that we meet expectations
and build customer loyalty through the following:
providing efficient order processing centers to support operations;
offering highly-personalized and responsive customer service;
offering a satisfaction guarantee product return policy;
providing comprehensive corporate websites (www.mannatech.com, www.allaboutmannatech.com,
www.mannatechscience.org and www.mannathink.com), that provide instant access to Internet
ordering, marketing, technical and educational information, and unique and innovative marketing
tools;
offering free personalized websites for our independent associates;
maintaining an extensive web-based downline management system called Success Tracker™ that
provides access to web conferencing and downline organization reporting for our independent
associates at minimal costs;
offering, in the United States and Canada, an effective compilation of online marketing and training
tools, including MannaPages webnotes and our Navig8 Global Business System;
offering updated training/orientation and compliance programs for our independent associates;
providing strategically based distribution fulfillment centers to ensure products are shipped on time
and at minimal cost;
inviting customer input on innovative product ideas, which is gathered and tabulated on
www.mannathink.com; and
sponsoring several marketing events, designed to provide information, education, and motivation for
our dedicated business-building associates and to help stimulate business development. These events
provide an interactive venue for introducing new products and services and allow interaction between
our management teams, outside researchers, and independent associates.
6. Flexible Operating Strategy. We believe efficiency, focus, and flexibility are paramount to our operations. For over
a decade, we have contracted with third parties to supply and manufacture our proprietary raw materials and
products, which we believe allows us to minimize capital expenditures, capitalize on such parties’ expertise, and
build additional resources for strategic alliances in the areas of distribution and logistics, product registration, and
export requirements. By contracting with various suppliers and manufacturers and by outsourcing distribution for all
of our foreign operations, except Europe, we believe we can quickly adapt operations to current demands in a
timely, efficient, and cost-effective manner. We monitor the performance of our third party contractors to ensure
they maintain a high quality of service. In addition, we identify alternative sources for our raw materials suppliers
and finished goods manufacturers to help prevent any risk of interruption in production should any existing
contractors become unable to perform satisfactorily.
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7. Experience and Depth of Our Management Team and Board of Directors. We believe that our team of executives
has extensive experience in every aspect of business operations and is highly focused on our success. Our Board of
Directors is composed of six directors, including four independent directors. We believe our board members have a
wealth of knowledge and experience in most aspects of our business operations and are especially well versed in
network marketing, finance, nutritional products, regulatory matters, and corporate governance. Our entire
management team is committed to delivering high-quality products and superior service.
Business Strategy
Our long-term goal is to be one of the world’s leading network marketing companies founded on the best science-
based proprietary products, along with a powerful global independent network distribution model. To achieve our goal, we
believe we must focus on the following business priorities:
Strengthening our Financial Results and Adding Value to Our Shareholders and Independent Associates.
We focus on improving financial results by striving to increase our revenues in both our domestic and foreign
operations and to control our operating costs.
Attracting New Independent Associates and Retaining Existing Independent Associates. We continually
examine our global associate career and compensation plan and periodically offer incentives in order to attract,
motivate, and retain independent associates. We believe our global associate career and compensation plan
encourages greater associate retention, motivation, and productivity.
Carefully Planning and Executing New Market Entries. In order to expand efficiently around the globe, we
must continue to present maximum opportunity to our current associates as well as those who will join us in the
future.
Developing New Products and Enhancing Existing Products. We continue to focus on new areas for future
product development. We continue our research efforts and strive to ensure that all of our products are made
from high quality, effective ingredients that contain one or more of our proprietary compounds, which we
believe supports our goal to be a cutting-edge industry leader. We expect that any future products we develop
will further complement and enhance our existing products.
Intellectual Property
Trademarks. We pursue registrations for various trademarks associated with our key products and branding
initiatives. As of December 31, 2012, we had 37 registered trademarks in the United States and two trademark applications
pending with the United States Patent and Trademark Office. As of December 31, 2012, we had 528 registered trademarks in
31 countries and 46 trademark applications pending in foreign jurisdictions. Globally, the protection available in foreign
jurisdictions may not be as extensive as the protection available to us in the United States. Where available, we rely on
common law trademark rights to protect our unregistered trademarks, even though such rights do not provide us with the
same level of protection as afforded by a United States federal trademark registration. Common law trademark rights are
limited to the geographic area in which the trademark is actually used. A United States federal trademark registration enables
us to stop infringing use of the trademark by a third party anywhere in the United States provided the unauthorized third
party user does not have superior common law rights in the trademark within a specific geographical area of a particular state
or region prior to the date our mark federally registers. In the United States (and in many foreign jurisdictions) a registered
trademark is valid for ten years and may be renewed subject to the trademark owner demonstrating continued use of the mark
in commerce.
Patents. The Company applies for patent protection in various countries for the technology related to our product
formulations. As of December 31, 2012, we had 53 patents for technology related to our Ambrotose® formulation, six of
which are in the United States and the remainder of which are in 31 foreign jurisdictions. Overall, as of December 31, 2012,
85 patents have been issued to Mannatech worldwide for the technology relating to our Ambrotose®, Ambrotose AO®, GI-
ProBalance™, and PhytoMatrix® product formulations, as well as in the field of biomarker assays. Currently, we have 54
patent applications pending in various jurisdictions relating to the technology supporting the above listed products. Patent
protection means that the patented invention cannot be commercially made, used, distributed or sold without the patent
owner's consent. These patent rights are usually enforced in a court, which, in most jurisdictions, holds the authority to stop
patent infringement. The protection is granted for a limited period, generally 20 years. In most jurisdictions, renewal
annuities or maintenance fees must be paid regularly during the term of the patent to keep the patent in force.
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Associate Distribution System
Overview. Our sales philosophy is to distribute our products through network marketing channels where consumers
purchase products for personal consumption or resale. Members purchase our products for personal use at a discounted retail
value, but do not participate in our global associate career and compensation plan. Independent associates purchase our
products at a discounted wholesale value and are eligible to participate in our global associate career and compensation plan.
All of our associates are independent contractors. We provide each new independent associate with our policies and
procedures that require the independent associates to comply with regulatory guidelines and act in a consistent and
professional manner.
Our revenues are heavily dependent upon the retention and productivity of independent associates who help us
achieve long-term growth. We believe the introduction of new innovative incentives, such as travel incentives, will continue
to motivate our independent associates and help expand our global purchasing base. We remain actively committed to
expanding the number of our independent associates through recruitment, support, motivation, and incentives. We had
approximately 229,000 active independent associates and members purchasing our products and packs during each of the 12
months ended December 31, 2012 and 2011, respectively.
Currently, we offer a 10% discount to independent associates and members who enroll in our automatic monthly
order program to promote operating efficiencies, through which our independent associates can receive a standing order
every four weeks and our members can receive a standing order once a month. Automatic monthly orders, on average,
account for approximately 64% of our total orders placed during a calendar month.
Independent Associate Development. Network marketing consists of enrolling individuals who build a network of
independent associates, members, and retail customers who purchase products. We support our independent associates by
providing an array of support services that can be tailored to meet individual needs, including:
offering educational meetings and corporate-sponsored events that emphasize business-building and
compliance related information;
sponsoring various informative and science-based conference calls, web casts, and seminars;
providing automated services through the Internet and telephone that offer a full spectrum of information and
business-building tools;
maintaining an efficient decentralized ordering and distribution system;
providing highly personalized and responsive order processing and customer service support accessible by
multiple communication channels including telephone, Internet, or e-mail;
offering 24-hour, seven days a week access to information and ordering through the Internet;
offering Success TrackerTM, a customized business-building genealogy system, which contains graphs, maps,
alerts, reports, and web video conferencing for our independent associates;
offering, in the United States and Canada, a compilation of online marketing and training tools, including
MannaPages webnotes and our Navig8 Global Business System; and
providing a wide assortment of business-building and educational materials to help stimulate product sales and
simplify enrollment.
We provide product and network marketing training and education for new independent associates. This includes a
unique global training/orientation program that uses audio, video and web components to familiarize new associates with the
Company, and includes short, segmented trainings on how to succeed as part of the sales force. We also regularly provide
training on using online tools such social media and our own suite of web marketing tools specifically designed for
associates to use. We also offer a variety of brochures, monthly newsletters, and other promotional materials to associates to
assist in their sales efforts, training, and continuing education. We continually update our training and promotional materials
to provide our associates with the most current information and motivational tools.
Our global associate career and compensation plan consists of eight independent associate achievement levels; from
lowest to highest, these include regional, national, executive, presidential, bronze, silver, gold, and platinum. These
achievement levels are determined by the growth and volume of the independent associates’ direct and indirect
commissionable net sales, as well as expanding their networks, which are all assigned a point volume. Promotional materials
and training aids are not assigned a point volume. This point volume system, referred to as our global seamless downline
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structure, allows independent associates to build their network by expanding their existing downlines into all international
markets. Our global associate career and compensation plan is intended to comply with all applicable governmental
regulations that govern the various aspects of payments to independent associates in each country.
Based upon our knowledge of industry-related network marketing compensation plans, we believe our global
associate career and compensation plan remains strong in the industry and is currently among the most financially rewarding
plans offered. Together, our commissions and incentives range approximately from 41% to 43% of our consolidated net
sales.
Our global associate career and compensation plan pays various types of commissions and incentives based upon a
point system that calculates a percentage of the independent associate’s commissionable direct and indirect net sales and the
attainment of certain associate achievement levels. All payments to our independent associates are made after they have
earned their commissions. We believe our global associate career and compensation plan fairly compensates our independent
associates at every stage of building their business by quickly rewarding an independent associate for both the breadth and
depth of their global seamless downline structure.
Our global associate career and compensation plan identifies and pays 19 types of commissions to our qualified
independent associates, which are based on the following:
generating product sales from an independent associate’s global downline to earn certain achievement levels;
enrolling new independent associates or members who place a product order;
obtaining certain achievement levels and enrolling other independent associates who place monthly automatic
orders in a downline;
obtaining and developing certain achievement levels within their downline organizations to qualify for
additional bonuses;
building a team of six qualified independent associates in their global downlines who order products regularly;
and
various other incentive programs.
Management of Independent Associates. We actively monitor our independent associates’ sales of our products
and the promotion of certain business opportunities by requiring our independent associates to abide by our policies and
procedures. However, we have limited control over the actions of our independent associates. To aid in our monitoring
efforts, we provide each independent associate with a copy of our policies and procedures prior to or upon signing up as an
independent associate. We also use various media formats to distribute changes to our mandatory policies and procedures,
including our corporate website, conference calls, educational meetings, corporate events, seminars, and webcasts.
Our legal/compliance department, in cooperation with other departments and associates, periodically evaluates the
conduct of our independent associates and the need for new or revised policies and procedures. Our monitoring efforts
include reviewing associates’ websites, promotional materials, and meetings. Our legal/compliance program assists in
maintaining high ethical standards among our independent associates, which helps our independent associates in their sales
efforts.
To help manage our associates, our legal/compliance department periodically monitors independent associates’
websites for content. In addition, associates may use our anonymous compliance reporting system to report non-compliant
websites to the compliance department, which then further investigates such websites. In an effort to decrease the number of
independent websites owned by our independent associates and to preserve and protect our trademarks, we offer standardized
personal web pages to our associates that help them with their sales efforts and provides consistent, standardized information,
and education. We also offer our independent associates and members a free standardized website through our Navig8
Global Business System service.
Our legal/compliance program also provides our independent associates with a standardized and anonymous
complaint process. When a complaint is filed against an independent associate, our legal/compliance department conducts a
mandatory investigation of the allegations, if warranted. Depending on the nature of the violation, we may suspend or
terminate the non-compliant associate’s agreement or we may impose various sanctions, including written warnings,
probation, withholding commissions, and termination of associate status. We will terminate any associate’s agreement for
making claims that our products can treat, cure, mitigate or prevent any disease, unless such claim is de minimus and
isolated.
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Product Return Policy. We stand behind our packs and products and believe we offer a reasonable and industry-
standard product return policy to all of our customers. We do not resell returned products. Refunds are not processed until
proper approval is obtained. All refunds must be processed and returned in the same form of payment that was originally
used in the sale. Each country in which we operate has specific product return guidelines. However, we allow our
independent associates and members to exchange products as long as the products are unopened and in good condition. Our
return policies for our retail customers and our independent associates and members are as follows:
Retail Customer Product Return Policy. This policy allows a retail customer to return any of our products to
the original independent associate who sold the product and receive a full cash refund by the independent
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 the remaining countries. The independent associate
may then return or exchange the product based on the independent associate product return policy.
Independent Associate and Member Product Return Policy. This policy allows the independent associate or
member to return an order within one year of the purchase date upon terminating his/her account. If an
independent associate or member returns a product unopened and in good condition, he/she may receive a full
refund minus a 10% restocking fee. We may also allow the independent associate or member to receive a full
satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding
promotional materials. This satisfaction guarantee refund applies in the United States and Canada, only for the
first 180 days following the product’s purchase, and applies in the remaining countries for the first 90 days
following the product’s purchase; however, any commissions earned by an independent associate will be
deducted from the refund. If we discover abuse of the refund policy, we may terminate the independent
associates’ or member’s account.
Information Technology Systems
Our information technology and e-commerce systems include a transaction-processing database, financial systems,
an associate management system, and comprehensive management tools that are designed to:
minimize the time required to process orders and distribute products;
provide customized ordering information;
quickly respond to information requests, including providing detailed and accurate information to independent
associates about qualification and downline activity;
provide detailed reports about paid commissions and incentives;
support order processing and customer service departments; and
help monitor, analyze, and report operating and financial results.
To complement our transaction database, we developed a comprehensive management tool called Success Tracker™
that is used both internally and by our independent associates to manage and optimize their business organizations. With this
tool, independent associates have constant access to graphs, maps, alerts, and reports on the status of their individual
organizations, which helps to optimize their earnings.
We also maintain a written service continuity disaster recovery plan, which was developed using the guidelines
published by the National Institute of Standards of Technology to minimize the risk of loss due to any interruption in
business. Our disaster recovery plan encompasses all critical aspects of our business and identifies contacts and resources.
Additionally, we perform daily backup procedures and proactively monitor various software, hardware, and network
infrastructure systems. We also perform routine maintenance procedures and periodically upgrade our software and hardware
to help ensure that our systems work efficiently and effectively and to minimize the risk of business interruption. Although
we maintain an extensive disaster recovery plan, a long-term failure or impairment of any of our information technology
systems could adversely affect our ability to conduct day-to-day business. Please see “Risk Factors – If our information
technology system fails, our operations could suffer.”
We continue to enhance our information technology, websites, and e-commerce platforms to remain competitive
and efficient.
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Government Regulations
Domestic Regulations. In the United States, governmental regulations, laws, administrative determinations, court
decisions, and similar legal requirements at the federal, state, and local levels regulate companies such as ours and network
marketing activities. Such regulations address, among other things:
direct selling and network marketing systems;
transfer pricing and similar regulations affecting the amount of foreign taxes and customs duties paid;
taxation of independent associates and requirements to collect taxes and maintain appropriate records;
how a company manufactures, packages, labels, distributes, imports, sells, and stores products;
product ingredients;
product claims;
advertising; and
the extent to which companies may be responsible for claims made by independent associates.
The following governmental agencies regulate various aspects of our business and our products in the United States:
the FDA;
the Federal Trade Commission (the “FTC”);
the Consumer Product Safety Commission;
the Department of Agriculture;
the Environmental Protection Agency;
the United States Postal Service;
state attorney general offices; and
various agencies of the states and localities in which our products are sold.
The FDA regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution, and sale
of foods, dietary supplements, over-the-counter drugs, medical devices, and pharmaceuticals. In January 2000, the FDA
issued a final rule called “Statements Made for Dietary Supplements Concerning the Effect of the Product on the Structure or
Function of the Body”. In the rule and its preamble, the FDA distinguished between permitted claims under the Federal
Food, Drug and Cosmetic Act relating to the effect of dietary supplements on the structure or functions of the body, and
impermissible direct or implied claims of the effect of dietary supplements on any disease. In June 2007, the FDA issued a
rule, as authorized under the Act that defined current Good Manufacturing Practices in the manufacture and holding of
dietary supplements. Effective January 1, 2006, legislation required specific disclosures in labeling where a food, including a
dietary supplement, contains an ingredient derived from any of eight named allergens. Legislation passed at the end of 2006
now requires us to report to the FDA any reports of “serious adverse events” associated with the use of a dietary supplement
or an over-the-counter drug that is not covered by new drug approval reporting.
The Dietary Supplement Health and Education Act of 1994, referred to as DSHEA, revised the provisions of the
Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and statutorily
created a new class entitled “dietary supplements.” Dietary supplements include vitamins, minerals, herbs, amino acids, and
other dietary substances used to supplement diets. A majority of our products are considered dietary supplements as outlined
in the Act, which requires us to maintain evidence that a dietary supplement is reasonably safe. A manufacturer of dietary
supplements may make statements concerning the effect of a supplement or a dietary ingredient on the structure or any
function of the body, in accordance with the regulations described above. As a result, we make such statements with respect
to our products. In some cases, such statements must be accompanied by a statutory statement that the claim has not been
evaluated by the FDA and that the product is not intended to treat, cure, mitigate, or prevent any disease, and the FDA must
be notified of such claim within 30 days of first use.
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The FDA oversees product safety, manufacturing, and product information, such as claims on a product’s label,
package inserts, and accompanying literature. The FDA has promulgated regulations governing the labeling and marketing of
dietary and nutritional supplement products. The regulations include:
the identification of dietary or nutritional supplements and their nutrition and ingredient labeling;
requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional
support;
labeling requirements for dietary or nutritional supplements for which “high potency,” “antioxidant,” and
“trans-fatty acids” claims are made;
notification procedures for statements on dietary and nutritional supplements; and
pre-market notification procedures for new dietary ingredients in nutritional supplements.
We develop and maintain product substantiation dossiers, which contain the scientific literature pertinent to each
product and its ingredients. An independent scientist reviews these dossiers, which provide the scientific basis for product
claims. We periodically update our substantiation program for evidence for each of our product claims and notify the FDA of
certain types of performance claims made in connection with our products.
In certain markets, including the United States, specific claims made with respect to a product may change the
regulatory status of a product. For example, a product sold as a dietary supplement but marketed as a treatment, prevention,
or cure for a specific disease or condition would likely be considered by the FDA or other regulatory bodies as unapproved
and thus an illegal drug. To maintain the product’s status as a dietary supplement, its labeling and marketing must comply
with the provisions in DSHEA and the FDA’s extensive regulations. As a result, we have procedures in place to promote and
assure compliance by our employees and independent associates related to the requirements of DSHEA, the Food, Drug and
Cosmetic Act, and various other regulations.
Dietary supplements are also subject to the Nutrition, Labeling and Education Act and various other acts that
regulate health claims, ingredient labeling, and nutrient content claims that characterize the level of nutrients in a product.
These acts prohibit the use of any specific health claim for dietary supplements unless the health claim is supported by
significant scientific research and is pre-approved by the FDA.
The FTC and other regulators regulate marketing practices and advertising of a company and its products. In the
past several years, regulators have instituted various enforcement actions against numerous dietary supplement companies
for false and/or misleading marketing practices, as well as misleading advertising of products. These enforcement actions
have resulted in consent decrees and significant monetary judgments against the companies and/or individuals involved.
Regulators require a company to convey product claims clearly and accurately and further require marketers to maintain
adequate substantiation for their claims. More specifically, the FTC requires such substantiation to be competent and reliable
scientific evidence and requires a company to have a reasonable basis for the expressed and implied product claim before it
disseminates an advertisement. A reasonable basis is determined based on the claims made, how the claims are presented in
the context of the entire advertisement, and how the claims are qualified. The FTC’s standard for evaluating substantiation is
designed to ensure that consumers are protected from false and/or misleading claims by requiring scientific substantiation of
product claims at the time such claims are first made. The failure to have this substantiation violates the Federal Trade
Commission Act.
Due to the diverse scope of regulations applicable to our products and the various regulators enforcing these
requirements, determining how to conform to all requirements is often open to interpretation and debate. However, our
policy is to fully cooperate with any regulatory agency in connection with any inquiries or other investigations. We can make
no assurances that regulators will not question our actions in the future, even though we continue to make efforts to comply
with all applicable regulations, inquiries, and investigations.
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International Regulations. We are also subject to extensive regulations in each country in which we operate.
Currently we sell our products in three regions: (i) North America (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, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of
Korea, Singapore and Taiwan). In November 2012, the Company commenced the shipment of its products to the Ukraine
and in December 2012, the Company commenced the shipment of its products to Hong Kong. Some of the country-specific
regulations include the following:
the National Provincial Laws, Natural Health Product Regulations of Canada, and the Federal Competition Act
in Canada;
the Therapeutic Goods Administration and the Trade Practices Act in Australia;
federal and state regulations in Australia;
national regulations including the Local Trading Standards Offices in the United Kingdom;
regulations from the Ministry of International Trade and Industry in Japan;
regulations from the Commerce Commission and the Fair Trade Act of 1993 in New Zealand;
the Fair Trade Commission, which oversees the Door to Door Sales Act and the Health and Functional Food
Act enforced by the Korea Food and Drug Administration in the Republic of Korea;
the Fair Trade Law, which is enforced by the Taiwan Fair Trade Commission and the Administration of Food
Hygiene, Health Food Products Administration Act enforced by the Taiwan Department of Health;
the Danish Health Board, the Danish Marketing Practice Act, the Danish Consumer Ombudsman, the Danish
Executive Order on Dietary Supplements, the Guidelines for food supplements, and the Danish Act on
Foodstuffs in Denmark;
the German Unfair Competition Act, German Regulation on food supplements, and German Law on food and
feed;
regulations governing business practices in South Africa;
the Consumer Protection Act, the Sale of Food Act, and various regulations that are governed by the Ministry
of Trade and Industry in Singapore;
the Austrian Trade Law (1994), the Food Safety and Consumer Protection Law (2006), and the Food Code in
Austria;
the Food and Consumer Products and the Unfair Trade Practices Act, Door to Door Selling Act and Provisions
of the General Dutch Civil Code relating to terms and conditions and misleading advertising in the Netherlands;
the Consumer Sales Act, Marketing Practices Act, Distance and Doorstep Sales Act, the Product Liability Act,
Product Safety Act, the Companies Act and the Food Act in Sweden;
the Law on Marketing and Contract Conditions, the Law on Repentance Right, the Statutory Order on Self
Inspection of Food Provisions, the Law on Food products and Food Safety, and various guidelines from the
Norwegian Consumers Agency on telephone selling and internet marketing, in Norway;
the Health Law and various Official Mexican Standards, the consumer protection law, the Mexican Corporate
law, the Foreign Investment Law, the Federal Labor law in Mexico, as well as various municipal and state
regulations and codes;
various Business, Civil, and Labor Codes in the Czech Republic as well as the Consumer Protection Act, and
regulations and edicts of various government agencies such as The Ministry of Health, National Institute of
Public Health, State Institute of Drug Control and the Czech Agriculture and Food Inspection Authority;
the Consumer Protection Act in Estonia, and in the area of food supplements the Veterinary and Food Board
also enforces local legislation including Estonia Food Act and Medicine Act;
the Finnish Food Act, the Finnish Food Packaging and Consumer Protection Acts, Act on Unfair Business
Practice Act, Decrees and other regulations in Finland;
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the Consumer Protection Act of 2007, the Distance Selling Regulations Act of 2001 in Ireland; and
various European Union (“EU”) regulations and pronouncements address both our selling activities and the sale
of food supplements in EU member nations, however, at the current time the local statutes and regulations
stated above are ascendant to the EU pronouncements if in conflict. The primary EU regulations pertaining to
Food Supplements include: the EU Food Supplement Directive (2002/46/EC) and Nutrition and Health Claims
Regulations (2006/1924/EC).
customs regulations in the Ukraine and Hong Kong governing the importation of our products for personal use.
Regulations Regarding Network Marketing System and Our Products. Our network marketing system and our
global associate career and compensation plan are also subject to a number of governmental regulations including various
federal and state statutes administered by the FTC, various state authorities, and foreign government agencies. The legal
requirements governing network marketing organizations are directed, in part, to ensure that product sales are ultimately
made to consumers. In addition, earnings within a network marketing company must be based on the sale of products rather
than compensation for (i) the recruitment of distributors or associates, (ii) investments in the organization, or (iii) other non-
retail sales-related criteria. For instance, some countries limit the amount associates may earn from commissions on sales by
other distributors or independent associates that are not directly sponsored by that distributor or independent associate. Prior
to expanding our operations into any foreign jurisdiction, we must first obtain regulatory approval for our network marketing
system in jurisdictions requiring such approval. To help ensure regulatory compliance, we rely on the advice of our outside
legal counsel and regulatory consultants in each specific country.
As a network marketing company, we are also subject to regulatory oversight, including routine inquiries and
enforcement actions, from various United States state attorneys general offices. Each state has specific acts referred to as
Little FTC Acts. Each state act is similar to the federal laws. As a result, each state may perform its own inquiries about our
organization and business practices, including allegations related to distributors or independent associates. To combat such
industry-specific risk, we provide a copy of our published associate policies and procedures to each independent associate,
publish these policies on our corporate website, and provide educational seminars and publications. In addition, we maintain
a legal/compliance department to cooperate with all regulatory agencies and investigate allegations of improper conduct by
our independent associates.
In Canada, our network marketing system is regulated by both national and provincial laws. Under Canada’s
Federal Competition Act, we must make sure that any representations relating to compensation to our independent associates
or made to prospective new independent associates constitute fair, reasonable, and timely disclosure and that such
representations meet other legal requirements of the Federal Competition Act. All Canadian provinces and territories, other
than Ontario, have legislation requiring that we register or become licensed as a direct seller within that province to maintain
the standards of the direct selling industry and to protect consumers. Some other Canadian provinces require that both we and
our independent associates be licensed as direct sellers.
In Australia, our network marketing system is subject to Australia’s federal and local regulations. Our global
associate career and compensation plan is designed to comply with Australian law and the requirements of Australia’s Trade
Practices Act. The Australian Trade Practices Administration and various other governmental entities regulate our business
and trade practices, as well as those of our independent associates. Australia’s Therapeutic Goods Act, together with the
Trade Practices Act, regulates any claims or representations relating to our products and our global associate career and
compensation plan. An agreement to establish a joint scheme for the regulation of therapeutic products was signed by both
the New Zealand and Australian governments in December 2003. The agency was initially expected to begin operating in
July 2005, but on July 16, 2007, the New Zealand government announced that it would not proceed with legislation for the
establishment of the joint agency because it did not have sufficient support of the New Zealand parliament. However, both
the Australian and New Zealand governments remain committed to the vision of the joint agency and are expected to revisit
it again in the future. The proposed harmonization of laws and regulatory bodies is anticipated to provide a more consistent
approach to dietary supplement laws between the two countries.
In New Zealand, our network marketing system and our operations are subject to regulations of the Commerce
Commission and the Ministry of Health, New Zealand Medical Devices Safety Authority, the Unsolicited Goods Act of
1975, the Privacy Act of 1993, and the Fair Trading Act of 1993. These regulations enforce specific kinds of business or
trade practices and regulate the general conduct of network marketing companies. The Commerce Commission also enforces
the Consumer Guarantees Act, which establishes specific rights and remedies with respect to transactions involving the
provisions of goods and services to consumers. Finally, the New Zealand Commerce Commission and the Ministry of Health
15
both enforce the Door-to-Door Sales Act of 1967 and the NZ Medicines Act, which govern the conduct of our independent
associates.
In the United Kingdom, our network marketing system is subject to national regulations of the United Kingdom.
Our global associate career and compensation plan is designed to comply with the United Kingdom’s national requirements,
the requirements of the Fair Trading Act of 1973, the Data Protection Act of 1998, the Trading Schemes Regulations of
1997, and other similar regulations. The U.K. Code of Advertising and Sales Promotion regulates our business and trade
practices and the activities of our independent associates, while the Trading Standards Office regulates any claims or
representations relating to our operations. Our products are regulated by the Medicines and Healthcare Products Regulatory
Agency.
In Japan, our network marketing system, overall business operations, trade practices, global associate career and
compensation plan, and our independent associates are governed by Japan’s Door-to-Door Sales Law as enacted in 1976 by
the Ministry of International Trade and Industry. Our global associate career and compensation plan is designed to meet
Japan’s governmental requirements. Our product claims are subject to the Pharmaceutical Affairs Law, which prohibits the
making and publication of “drug effectiveness” claims regarding products that have not received approval from Japan’s
Ministry of Health, Welfare and Labor.
In the Republic of Korea, the primary body of law applicable to our operations is the Door-to-Door Sales Act,
which governs the behavior of network marketing companies and affiliated distributors. The Door-to-Door Sales Act is
enforced by the Fair Trade Commission. In the Republic of Korea, our products are categorized as health and functional
foods and are regulated by the Health and Functional Food Act of 2004, with which the Company complies.
In Taiwan, our network marketing system, overall operations and trade practices are governed by the Fair Trade
Law and the Consumer Protection Law. Such laws contain a wide range of provisions covering trade practices. Our products
are governed by the Taiwan Department of Health and various legislation in Taiwan including the Health Food Control Act
of 1999. This Act was enacted to enhance the management and supervision of matters relating to health, food, protecting the
health of people and safeguarding the rights and interests of consumers.
In Denmark, the notion of door-to-door selling is prohibited. As a result, under Danish law, the trader is not allowed
to contact the consumer at his home, place of work, or other non-public place in order to conclude a contract on certain
subjects. However, the prohibition has an exemption when the consumer asks the trader for a contact in writing or upon
written prior consent. In addition, the Danish Marketing Practices Act, the Guidelines from the Danish Consumerombudsman
and the rules contained in the Danish Consumer Contracts Act govern our network marketing system. There is no
requirement for pre-approval of our products in Denmark; however, our products are subject to a yearly inspection carried
out by the Food authorities. Further, all our activities are subject to Self Inspection, the results of which are also controlled
once a year by the Food authorities. The rules for marketing and sale of dietary supplements are covered by the Danish
Executive Order on Food Supplements, as well as by the Danish Act on Foodstuffs and various EU-regulations. Denmark
also subjects the marketing of a company’s food supplements to a notification procedure (with a pre-market approval process
for certain substances), before a product may be lawfully marketed in Denmark. Full product compliance with all Danish
provisions is reviewed by the Food authorities once a year.
In Germany, there is no specific legal regulation covering network marketing company practices. However, under
certain circumstances network marketing systems may have to follow the German Unfair Competition Act. Our independent
associates’ conduct is subject to the German statute that governs the conduct of a commercial agent. In addition, direct
selling operations are governed by the Industrial Code, which requires direct sellers to hold itinerant trader’s cards. The
German Regulation on food supplements and the German Law on food and feed govern vitamin and mineral substances and
herbs and other substances, respectively.
In South Africa, there are no specific regulations for the network marketing industry. In general, the Consumer
Affairs Act 1988, the Competition Act 1998, and the Advertising Standards Authority Code of Advertising Practice (a
voluntary code enforced by the media) govern business practices. The products are classified as complementary medicines
for which there are no specific regulations. The Foodstuffs, Cosmetics and Disinfectants Act 1972, and the Medicines and
Related Substances Act 1965 currently apply.
In Singapore, the network marketing industry is governed by the Multi-Level Marketing and Pyramid Selling
(Prohibition) (Amendment) Act and the accompanying Pyramid Selling (Excluded Schemes and Arrangements) Order 2000
and Order 2001. General business practices and advertising are regulated under the Consumer Protection (Fair Trading) Act
2003, as amended, and its accompanying regulations. The products are classified as food and supplements of a food nature,
which are governed by the Sale of Food Act and the Singapore Food Regulations. Cosmetics and products that rise to the
16
level of medicinal and other health-related products are regulated under various regulations such as the Medicines Act, the
Poisons Act, the Sale of Drugs Act, the Medicines (Advertisement and Sale) Act and the Misuse of Drug Regulations.
In Austria, the Austrian Trade Law of 1994 (Novelle 2002) prohibits the offer of direct sale to an individual
consumer of food supplement and cosmetic products. The provision, however, has generally not been enforced in recent
years and sales made via the Internet or mail order or made to a non-consumer distributor do not fall under this prohibition.
The Austrian Trade Law is predominantly administered through the National Ministry of Economy and Labor. Our business
operations within Austria are conducted from beyond the borders of Austria, which is the common practice in our industry.
Our distributors qualify as “traders” for purposes of Austrian state and municipal laws. Traders are regulated by the local
chambers of commerce and must obtain licenses from the respective chambers of commerce. Regulation of food supplements
and cosmetics is generally harmonized throughout the EU and must conform to EU standards. Austrian-specific food
regulations include the Food Safety and Consumer Protection Law (2006), supporting ordinances to this law, the Food
Supplement Law, and the Austrian Food Codex, which is primarily administered by the National Ministry of Health, Office
for Health and Food Security, and the Local Health Authority.
In Sweden various provisions of the Consumer Sales Act (1990), the Marketing Practices Act (2008), the Distance
and Doorstep Sales Act (2005), the Product Liability Act (1992), the Product Safety Act (2004), and the Companies Act
(2005) all serve to govern our multi-level marketing and business activities. The Food Act (2006) provides regulations and
guidelines for the sale of food and food supplements. We are subject to the authority of the Swedish Consumer Office, the
Swedish Companies Registration Office, the Swedish Tax Office, Swedish Customs, Medical Products Agency, and the
National Food Administration. As in all EU countries various EU regulations and guidelines apply.
In the Netherlands, the Food and Consumer Product and the Unfair Trade Practices Act are the most relevant
legislations relating to our business practices. The first is enforced by the Food and Consumer Product Safety Authority and
the latter is enforced by the Consumer Authority. Furthermore, various EU regulations apply as well as the Dutch Door to
Door Selling Act, and all provisions of the Dutch Civil Code with particular emphasis to those regulations dealing with
general terms and conditions, and those regarding misleading advertising.
Norway exercises a border control of products and their composition upon importation. Import products must be
registered in an Import Reporting Registry, and the regulations are enforced by the customs authorities. Our products must be
compliant with Norwegian regulations in order to be admitted for admission through customs into Norway. In Norway Door-
to-Door Selling is allowed, provided the Guidelines from the Norwegian Consumer Agency are followed. Likewise,
telephone-selling is allowed provided the agency’s guidelines are followed. Home-selling in Norway is also allowed. All of
our sales in Norway are subject to a 14-day right to cancel by the consumers.
In Mexico, as in many other markets, there are no specific regulations directly related to the direct selling or
network marketing industry. However, all product sales and business offerings must comply with the Consumer Protection
Law, which is enforced by the Consumer Protection Agency. Food supplements and medicines are subject to the Health Law
and various Official Mexican Standards, which are enforced by the Health Ministry and The Federal Commission for
Protection Against Sanitary Risk. Mexican Customs Law and its regulations govern the general importation of our products
into Mexico. We are subject to the Mexican Corporate Law, which is enforced by the Mexican courts and to the Federal
Labor Law enforced by the Labor Courts. In Mexico, we are also subject to the Foreign Investment Law and its regulations
administered by the Ministry of Economy. We are required to register before the Mexican System for Business Information
at the appropriate Business Chamber under the Organizations Law.
In the Czech Republic, there are no specific regulations or special legislation that limit the network marketing
industry. Network marketing is considered to be a specific form of general sale and is generally subject to various provisions
of the Business Code (Act. Nr. 513/1992 Coll.), Civil Code (Act. Nr. 40/1964 Coll.), Labor Code (Act. No. 262/2006 Coll.),
Trade License Act (Act. Nr. 455/1991 Coll.), Consumer Protection Act (Act. Nr. 634/1992 Coll.) and related legislation. The
status of independent contractor/sales distributor is primarily regulated by the Trade License Act (Act. Nr. 455/1991 Coll),
which requires sales distributors to maintain a trade license. Additionally, the regulation of food supplements is harmonized
throughout the EU and, therefore, the supplements must conform to the EU standards. Enforcement of Czech-specific
regulations is undertaken by the Ministry of Health, National Institute of Public Health, State Institute of Drug Control and
the Czech Agriculture and Food Inspection Authority.
In Estonia, there are no specific regulations governing the network marketing business, but the business is generally
regulated under the Consumer Protection Act. Also, independent distributors are required to register as sole proprietors with
the Tax and Customs Board before entry into associate agreements. Mannatech must also comply with various EU
regulations. The Veterinary and Food Board also enforces local legislation including Estonia Food Act and Medicine Act.
17
In Finland, the Finnish Food Act, the Finnish Food Packaging and Consumer Protection Acts, Act on Unfair
Business Practice Act, Decrees and other regulations, as well as applicable EU regulations, regulate Mannatech products,
product information, and the way Mannatech promotes its products. Additionally, certain principals applicable to multi-level
marketing under the Money Collection Act (255/2006) apply to Mannatech’s activities. Lastly, persons engaged in the
manufacture, commission of manufacture or import of food supplements, must submit a written notification to the Finnish
Food Safety Authority when marketing and selling in Finland. A notification is also required when the composition of
preparation changes in terms of characteristics of substances or the preparation is withdrawn from the market.
In the Republic of Ireland, the primarily relevant legislation is the Consumer Protection Act of 2007, the Distance
Selling Regulations Act of 2001, and the codes of practice of the Direct Selling Association of Ireland and the Advertising
Standards Authority for Ireland. There is no equivalent in Irish law to the UK Trading Schemes Regulations, but the Direct
Selling Association of Ireland codes, while not as prescriptive, contain many similar requirements. Lastly, the regulation of
food and food supplements are generally harmonized throughout the EU and must conform to EU standards.
Other Regulations. Our operations are also subject to a variety of other regulations, including:
social security taxes;
value-added taxes;
goods and services taxes;
sales taxes;
consumption taxes;
income taxes;
customs duties;
employee/independent contractor regulations;
employment, service pay, retirement pay, and profit sharing requirements;
import/export regulations;
federal securities laws; and
antitrust laws.
In many markets, we are limited by the types of rules we can impose on our independent associates, including rules
in connection with cooling off periods and termination criteria. If we do not comply with these requirements, we may be
required to pay social security, unemployment benefits, workers’ compensation, or other tax or tax-type assessments on
behalf of our independent associates and may incur severance obligations if we terminate one of our independent associates.
In some countries, including the United States, we are also governed by regulations concerning the activities of our
independent associates. Regulators may find that we are ultimately responsible for the conduct of our independent associates
and may request or require that we take additional steps to ensure that our independent associates comply with these
regulations. The types of conduct governed by these types of regulations may include:
claims made about our products;
promises or claims of income or other promises or claims by our independent associates; and
sales of products in markets where the products have not been approved or licensed.
In some markets, including the United States, improper product claims by independent associates could result in our
products being overly scrutinized by regulatory authorities. This review could result in our products being re-classified as
drugs or classified into another product category that requires stricter regulations or labeling changes.
We continuously research and monitor the laws governing the conduct of our independent associates, our
operations, our global associate career and compensation plan, and our products and sales aids within each of the countries in
which we sell our products. We provide education for our independent associates regarding acceptable business conduct in
each market through our policies and procedures, seminars, and other training materials and programs. However, we cannot
guarantee that our independent associates will always abide by our policies and procedures and/or act in a professional and
consistent manner.
18
Competition
Other Nutritional Supplement Companies. The nutritional supplement industry is steadily gaining momentum and
is intensely competitive. Our current direct competitors selling similar nutritional products include:
GNC Holdings, Inc.;
Herbalife Ltd.;
Nature’s Sunshine Products, Inc.;
NOW Foods;
Nu Skin Enterprises, Inc.;
Reliv’ International, Inc;
Solgar Vitamin and Herb Company, Inc.;
Swanson Health Products;
Usana Health Sciences, Inc.; and
Vitamin Shoppe Industries, Inc.
Network Marketing. Nutritional supplements are offered for sale in a variety of ways. Network marketing has a
limited number of individuals interested in participating in the industry, and we must compete for those types of individuals.
We believe network marketing is the best sales approach to sell our products for the following reasons:
our products can be introduced into the global marketplace at a much lower up-front cost than through
conventional methods;
our key ingredients and differential components found in our proprietary products can be better explained
through network marketing;
the network marketing approach can quickly and easily adapt to changing market conditions;
consumers appreciate the convenience of ordering from home, through a sales person, by telephone, or on the
Internet; and
network marketing enables independent associates to earn financial rewards.
We compete with other direct selling and network marketing companies for new independent associates and for
retention of continuing independent associates. Some of our competitors have longer operating histories, are better known, or
have greater financial resources. These companies include:
Amway Corporation;
Forever Living Products, Inc.;
Herbalife International, Inc.;
Mary Kay, Inc.;
Nature’s Sunshine Products, Inc.;
Nu Skin Enterprises, Inc.;
Reliv’ International, Inc.;
Shaklee Worldwide;
Usana Health Sciences, Inc.;
The availability of independent associates decreases when other network marketing companies successfully recruit
and retain independent associates for their operations. We believe we can successfully compete for independent associates by
emphasizing the following:
our unique patented, proprietary blend of high-quality products;
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our 19-year track record in the business of selling nutritional products;
our model which does not require our independent associates to carry inventory or accounts receivable;
our unique and financially rewarding global associate career and compensation plan;
our innovative marketing and educational tools; and
our easy and convenient delivery system.
Employees
At December 31, 2012 and 2011, we employed 310 and 387 people, respectively, as set forth below:
North America
Asia/Pacific
EMEA
Total
2012
182
92
36
310
2011
248
104
35
387
These numbers do not include our independent associates, who are independent contractors and are not considered
employees.
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Item 1A. Risk Factors
In addition to the other risks described in this report, the following risk factors should be considered in evaluating
our business and future prospects:
1. If we are unable to attract and retain independent associates, our business may suffer.
Our future success depends largely upon our ability to attract and retain a large active base of independent
associates and members who purchase our packs and products. We cannot give any assurances that the number of our
independent associates will continue at their current levels or increase in the future. Several factors affect our ability to attract
and retain independent associates and members, including:
on-going motivation of our independent associates;
general economic conditions;
significant changes in the amount of commissions paid;
public perception and acceptance of the wellness industry;
public perception and acceptance of network marketing;
public perception and acceptance of our business and our products, including any negative publicity;
the limited number of people interested in pursuing network marketing as a business;
our ability to provide proprietary quality-driven products that the market demands; and
competition in recruiting and retaining independent associates.
2. The loss of key high-level independent associate leaders could negatively impact our associate growth and
our revenue.
As of December 31, 2012, we had approximately 229,000 active independent associates and members who
purchased our products within the last 12 months, of which 147 occupied the highest associate level under our global
compensation plan. These independent associate leaders are important in maintaining and growing our revenue. As a result,
the loss of a high-level independent associate or a group of leading associates in the independent associates’ networks of
downlines, whether by their own choice or through disciplinary actions by us for violations of our policies and procedures,
could negatively impact our associate growth and our revenue.
3. Changes to our associate compensation arrangements could be viewed negatively by some independent
associates, could cause failure to achieve desired long-term results and have a negative impact on revenue.
Our associate compensation plan includes components that differ from market to market. We modify components of our
compensation plan from time to time in an attempt to remain competitive and attractive to existing and potential independent
associates including such modifications:
to address changing market dynamics;
to provide incentives to independent associates that are intended to help grow our business;
to conform to local regulations; and
to address other business needs.
Because of the size of our associate force and the complexity of our compensation plans, it is difficult to predict how
independent associates will view such changes and whether such changes will achieve their desired results.
4. An increase in the amount of commissions and incentives paid to independent associates and members
reduces our profitability.
The payment of commissions and incentives, including bonuses and prizes, is our most significant expense.
Together, our commissions and incentives range approximately from 41% to 43% of our consolidated net sales. We closely
monitor the amount of commissions and incentives as a percentage of net sales, and may periodically adjust our
compensation plan to better manage these costs. There can be no assurance that changes to the compensation plan will be
21
successful in achieving target levels of commissions and incentives as a percentage of net sales and preventing these costs
from having a significant adverse effect on our earnings. Furthermore, such changes may make it difficult to attract and
retain independent associates or cause us to lose some of our existing independent associates.
5. The loss of key management personnel could adversely affect our business.
We depend on the continued services of our executive officers and senior management team as they work closely
with independent associate leaders and are responsible for our day-to-day operations. Our success depends in part on our
ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract
additional qualified individuals to our management team. Although we have entered into employment agreements with
certain members of our senior management team, and do not believe that any of them are planning to leave or retire in the
near term, we cannot assure you that our senior managers will remain with us. The loss or limitation of the services of any of
our executive officers or members of our senior management team, including our regional and country managers, or the
inability to attract additional qualified management personnel could have a material adverse effect on our business, financial
condition, results of operations, or independent associate relations.
6. If government regulations regarding network marketing change or are interpreted or enforced in a manner
adverse to our business, we may be subject to new enforcement actions and material limitations regarding
our overall business model.
Network marketing is always subject to extensive governmental regulations, including foreign, federal, and state
regulations. Any change in legislation and regulations could affect our business. Furthermore, significant penalties could be
imposed on us for failure to comply with various statutes or regulations. Violations may result from:
ambiguity in statutes;
regulations and related court decisions;
the discretion afforded to regulatory authorities and courts interpreting and enforcing laws; and
new regulations or interpretations of regulations affecting our business.
7. Independent associates could fail to comply with our associate policies and procedures or make improper
product, compensation, marketing or advertising claims that violate laws or regulations, which could result
in claims against us that could harm our financial condition and operating results.
We sell our products worldwide to a sales force of independent associates. The independent associates are
independent contractors and, accordingly, we are not in a position to provide the same direction, motivation, and oversight as
we would if associates were our own employees. As a result, there can be no assurance that our associates will participate in
our marketing strategies or plans, accept our introduction of new products, or comply with our associate policies and
procedures. All independent associates sign a written contract and agree to adhere to our policies and procedures, which
prohibit associates from making false, misleading or other improper claims regarding products or income potential from the
distribution of the products. However, independent associates may from time to time, without our knowledge and in violation
of our policies, create promotional materials or otherwise provide information that does not accurately describe our
marketing program. There is a possibility that some jurisdictions could seek to hold us responsible for independent associate
activities that violate applicable laws or regulations, which could result in government or third party actions or fines against
us, which could harm our financial condition and operating results.
8. We may be held responsible for certain taxes or assessments relating to the activities of our independent
associates, which could harm our financial condition and operating results.
Our independent associates are subject to taxation and, in some instances, legislation or governmental agencies
impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition,
we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our
distributors. In the event that local laws and regulations require us to treat our independent distributors as employees, or if
our distributors are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may
be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties,
which could harm our financial condition and operating results.
22
9. Challenges by private parties to the form of our network marketing system could harm our business.
We may be subject to challenges by private parties, including our independent associates and members, to the form
of our network marketing system or elements of our business. In the United States, the network marketing industry and
regulatory authorities have relied on the implementation of distributor rules and policies designed to promote retail sales to
protect consumers, prevent inappropriate activities, and distinguish between legitimate network marketing distribution plans
and unlawful pyramid schemes. We have adopted rules and policies based on case law, rulings of the FTC, discussions with
regulatory authorities in several states, and domestic and global industry standards. Legal and regulatory requirements
concerning network marketing systems, however, involve a high level of subjectivity, are inherently fact-based, and are
subject to judicial interpretation. Because of this, we can provide no assurance that we would not be harmed by the
application or interpretation of statutes or regulations governing network marketing, particularly in any civil challenge by a
current or former independent associate or member.
10. If our network marketing activities do not comply with government regulations, our business could suffer.
Many governmental agencies regulate our network marketing activities. A government agency’s determination that
our business or our independent associates have significantly violated a law or regulation could adversely affect our business.
The laws and regulations for network marketing intend to prevent fraudulent or deceptive schemes. Our business faces
constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by
our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or
regulations. For example, in July 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel
L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and
the Texas Food, Drug and Cosmetic Act. We subsequently reached an agreement with the Texas Attorney General’s office
settling the enforcement action. Without admitting any wrongdoing, we agreed to refund up to $4 million to certain members
and paid $2 million to cover fees and expenses of Texas regulators. We also made certain corporate governance changes
required by the Texas Attorney General’s office and have taken a number of actions to address concerns raised by the Texas
Attorney General. If we are unable to comply fully with the provisions of the settlement, Texas regulators could pursue
further remedies that may impact our business.
In addition, in the past and because of the industry in which we operate, we have experienced inquiries regarding
specific independent associates.
11. If we violate governmental regulations or fail to obtain necessary regulatory approvals, our operations
could be adversely affected.
Our operation is subject to extensive laws, governmental regulations, administrative determinations, court
decisions, and similar constraints at the federal, state, and local levels in our domestic and foreign markets. These regulations
primarily involve the following:
the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our
products;
the health and safety of dietary supplements, cosmetics and foods;
trade practice laws and network marketing laws;
our product claims and advertising by our independent associates;
our network marketing system;
pricing restrictions regarding transactions with our foreign subsidiaries or other related parties and similar
regulations that affect our level of foreign taxable income;
the assessment of customs duties;
further taxation of our independent associates, which may obligate us to collect additional taxes and maintain
additional records; and
export and import restrictions.
Any unexpected new regulations or changes in existing regulations could significantly restrict our ability to
continue operations, which could adversely affect our business. For example, changes regarding health and safety and food
23
and drug regulations for our nutritional products could require us to reformulate our products to comply with such
regulations.
In some foreign countries, nutritional products are considered foods, while other countries consider them drugs.
Future health and safety or food and drug regulations could delay or prevent our introduction of new products or suspend or
prohibit the sale of existing products in a given country or marketplace. In addition, if we expand into other foreign markets,
our operations or products could also be affected by the general stability of such foreign governments and the regulatory
environment relating to network marketing and our products. If our products are subject to high customs duties, our sales and
competitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain
countries and jurisdictions could limit our ability to import products from the United States.
12. Increased regulatory scrutiny of nutritional supplements as well as new regulations that are being adopted
in some of our markets with respect to nutritional supplements could result in more restrictive regulations
and harm our results if our supplements or advertising activities are found to violate existing or new
regulations or if we are not able to effect necessary changes to our products in a timely and efficient
manner to respond to new regulations.
There has been an increasing movement in the United States and other markets to increase the regulation of dietary
supplements, which could impose additional restrictions or requirements on us and increase the cost of doing business. In
several of our markets, new regulations have been adopted, or are likely to be adopted, in the near-term that will impose new
requirements, make changes in some classifications of supplements under the regulations, or limit the claims we can make.
In addition, there has been increased regulatory scrutiny of nutritional supplements and marketing claims under existing and
new regulations. In Europe, for example, we are unable to market supplements that contain ingredients that have not been
previously marketed in Europe without going through an extensive registration and approval process. Europe is also expected
to adopt additional regulations in the near future to set new limits on acceptable levels of nutrients. The FDA has
implemented Good Manufacturing Practices for the U.S. nutritional supplement industry. Our operations could be harmed if
new regulations require us to reformulate products or effect new registrations, if regulatory authorities make determinations
that any of our products do not comply with applicable regulatory requirements, if the cost of complying with regulatory
requirements increases materially, or if we are not able to effect necessary changes to our products in a timely and efficient
manner to respond to new regulations. In addition, our operations could be harmed if governmental laws or regulations are
enacted that restrict the ability of companies to market or distribute nutritional supplements or impose additional burdens or
requirements on nutritional supplement companies.
13. If we are unable to protect the proprietary rights of our products, our business could suffer.
Our success and competitive position largely depends on our ability to protect the following proprietary rights:
our Ambrotose® complex, a glyconutritional dietary supplement ingredient consisting of a blend of
monosaccharides, or sugar molecules, used in the majority of our products;
the MTech AO Blend®, our proprietary, patent-pending antioxidant used in the Ambrotose AO® complex; and
a compound used in our reformulated Advanced Ambrotose® complex that allows for a more potent
concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe.
We have filed patent applications for the technology relating to Ambrotose®, Ambrotose AO®, Phytomatrix®, GI-
ProBalance™ and FiberSlim® in the United States and certain foreign countries. As of December 31, 2012, we had received
53 patents for the technology relating to Ambrotose® complex, six of which were issued in the United States and the
remainder of which were issued in 31 foreign jurisdictions. In addition, we have entered into confidentiality agreements with
our independent associates, suppliers, manufacturers, directors, officers, and consultants to help protect our proprietary
rights. Nevertheless, we continue to face the risk that our pending patent applications for our products may not issue or that
the patent protection granted is more limited than originally requested. As a precaution, we consult with outside legal
counsel and consultants to help ensure that we protect our proprietary rights. However, our business, profitability, and
growth prospects could be adversely affected if we fail to receive adequate protection of our proprietary rights.
14. Our inability to develop and introduce new products that gain independent associate, member, and market
acceptance could harm our business.
A critical component of our business is our ability to develop new products that create enthusiasm among our
independent associates and members. If we are unable to introduce new products, our independent associate productivity
24
could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements or
have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce
new products include, among others, government regulations, the inability to attract and retain qualified research and
development staff, the termination of third-party research and collaborative arrangements, proprietary protections of
competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in consumer
tastes and buying preferences.
15. Our failure to appropriately respond to changing consumer preferences and demand for new products or
product enhancements could significantly harm our relationship with independent associates and
members, our product sales, as well as our financial condition and operating results.
Our business is subject to changing consumer trends and preferences, including rapid and frequent changes in
demand for products, new product introductions, and enhancements. Our failure to accurately predict these trends could
negatively impact consumer opinion of our products, which in turn could harm our independent associate and member
relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number
of factors, including our ability to:
accurately anticipate consumer needs;
innovate and develop new products or product enhancements that meet these needs;
successfully commercialize new products or product enhancements in a timely manner;
price our products competitively;
manufacture and deliver our products in sufficient volumes and in a timely manner; and
differentiate our product offerings from those of our competitors.
If we do not introduce new products or make enhancements to meet the changing needs of our members in a timely
manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition,
and operating results.
16. If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a timely
fashion, our business could suffer.
Outside manufacturers make all of our products. Our profit margins and timely product delivery are dependent upon
the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our
ability to enter new markets and sustain satisfactory levels of sales in each market depends on the ability of our outside
suppliers and manufacturers to provide required levels of ingredients and products and to comply with all applicable
regulations. As a precaution, we have approved alternate suppliers and manufacturers for our products. However, the failure
of our primary suppliers or manufacturers to supply ingredients or produce our products could adversely affect our business
operations.
We believe we have dependable suppliers for all of our ingredients and we have identified alternative sources for all
of our ingredients, except Arabinogalactan. Due to the unique nature of Arabinogalactan, an important component used in the
formulation of our Ambrotose® complex, we are unable to identify an alternative supplier at this time. If our suppliers are
unable to perform, any delay in replacing or substituting such ingredients could affect our business.
17. The loss of suppliers or shortages of raw materials could have an adverse effect on our business, financial
condition, or results of operations.
We depend on outside suppliers for raw materials. Our contract manufacturers acquire all of the raw materials for
manufacturing our products from third-party suppliers. In the event we were to lose any significant suppliers and have
trouble in finding or transitioning to alternative suppliers, it could result in product shortages or product back orders, which
could harm our business. There can be no assurance that suppliers will be able to provide our contract manufacturers the raw
materials in the quantities and at the appropriate level of quality that we request or at a price that we are willing to pay. We
are also subject to delays caused by any interruption in the production of these materials including weather, crop conditions,
climate change, transportation interruptions and natural disasters or other catastrophic events.
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18. If we are exposed to product liability claims, we may be liable for damages and expenses, which could
affect our overall financial condition.
We could face financial liability from product liability claims if the use of our products results in significant loss or
injury. We can make no assurances that we will not be exposed to any substantial future product liability claims. Such claims
may include claims that our products contain contaminants, that we provide our independent associates and consumers with
inadequate instructions regarding product use, or that we provide inadequate warnings concerning side effects or interactions
of our products with other substances. We believe that we, our suppliers, and our manufacturers maintain adequate product
liability insurance coverage. However, a substantial future product liability claim could exceed the amount of insurance
coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect our overall
future financial condition.
In recent years a discovery of Bovine Spongiform Encephalopathy, (“BSE”), which is commonly referred to as
“Mad Cow Disease”, has caused concern among the general public. As a result, some countries have banned the importation
or sale of products that contain bovine materials sourced from locations where BSE has been identified. We have changed
the vast majority of our capsules to a vegetable base. However, if a vegetable base is not available or practical for use,
certifications are required to ensure the capsule material is BSE-free. The higher costs could affect our financial condition,
results of operations, and our cash flows.
19. Concentration Risk
A significant portion of our revenue is derived from our core Ambrotose® complex products, which include the
Ambrotose® products and Advanced Ambrotose® products. A decline in sales value of such legacy products could have a
material adverse effect on our earnings, cash flows, and financial position. Revenue from the core Ambrotose® products were
as follows for the years ended December 31, 2012, and 2011 (in thousands, except percentages):
Advanced Ambrotose®
Ambrotose®
Total
2012
2011
Sales by
product
66,280
12,143
78,423
$
$
% of total
net sales
38.2 % $
7.0 %
45.2 % $
Sales by
product
66,893
15,513
82,406
% of total
net sales
33.3 %
7.7 %
41.0 %
Our business is not currently exposed to customer concentration risk given that no independent associate has ever
accounted for more than 10% of our consolidated net sales.
20. If we incur substantial liability from litigation, complaints, or enforcement actions or incur liabilities or
penalties resulting from misconduct by our independent associates, our financial condition could suffer.
Routine enforcement actions and complaints are common in our industry. Although we believe we fully cooperate
with regulatory agencies and use various means to address misconduct by our independent associates, including maintaining
policies and procedures to govern the conduct of our independent associates and conducting training seminars, it is still
difficult to detect and correct all instances of misconduct. Violations of our policies and procedures by our independent
associates could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state,
or foreign regulatory authorities against us and/or our independent associates in each country. Because we have expanded
into foreign countries, our policies and procedures for our independent associates differ depending on the different legal
requirements of each country in which an independent associate does business. Any future litigation, complaints, and
enforcement actions involving us and/or our independent associates could consume considerable amounts of financial and
other corporate resources, which could have a negative impact on our business, profitability, and growth prospects.
21. The global nutrition industry is intensely competitive and the strengthening of any of our competitors could
harm our business.
The global nutrition industry is intensely fragmented and competitive. We compete for independent associates with
other network marketing companies outside the global nutrition industry. Many of our competitors have greater name
recognition and financial resources, which may give them a competitive advantage. Our competitors may also be able to
devote greater resources to marketing, promotional, and pricing campaigns that may influence our continuing and potential
26
independent associates and members to buy products from competitors rather than from us. Such competition could
adversely affect our business and current market share.
22. A downturn in the economy has affected consumer purchases of discretionary items such as the health and
wellness products that we offer, which could continue to have an adverse effect on our business, financial
condition, profitability, and cash flows.
We appeal to a wide demographic consumer profile and offer a broad selection of health and wellness products. A
downturn in the economy has adversely impacted consumer purchases of discretionary items such as health and wellness
products. During the last few years, the United States and global economies slowed dramatically as a result of a variety of
problems, including turmoil in the credit and financial markets, concerns regarding the stability and viability of major
financial institutions, the state of the housing markets, and volatility in worldwide stock markets. Given the significance and
widespread nature of these nearly unprecedented circumstances, the U.S. and global economies could remain significantly
challenged in a recessionary state for an indeterminate period of time. These economic conditions could cause many of our
existing and potential associates to delay or reduce purchases of our products for some time, which in turn could continue to
harm our business by adversely affecting our revenues, results of operations, cash flows and financial condition. We cannot
predict the duration of these economic conditions or the impact they will have on our consumers or business. For additional
information regarding current economic conditions and their impact on our results of operations, refer to Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23. If our international markets are not successful, our business could suffer.
We currently sell our products in the international markets of Canada, Mexico, Austria, the Czech Republic,
Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, Netherlands, Norway, South Africa, Sweden, the
United Kingdom, Australia, Japan, New Zealand, the Republic of Korea, Singapore and Taiwan and ship our products to the
Ukraine and Hong Kong through existing distribution channels. Our international operations could experience changes in
legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs. If we do
not adequately address such issues, our international markets may not meet growth expectations. Our international operations
and future expansion plans are subject to political, economic, and social uncertainties, including:
inflation;
the renegotiation or modification of various agreements;
increases in custom duties and tariffs;
changes and limits in export controls;
government regulations and laws;
trademark availability and registration issues;
changes in exchange rates;
changes in taxation;
wars and other hostilities; and
changes in the perception of network marketing.
Any negative changes related to these factors could adversely affect our business, profitability, and growth
prospects. Furthermore, any negative changes in our distribution channels may force us to invest significant time and money
related to our distribution and sales to maintain our position in certain international markets.
24. Adverse or negative publicity could cause our business to suffer.
Our business depends, in part, on the public’s perception of our integrity and the safety and quality of our products.
Any adverse publicity could negatively affect the public’s perception about our industry, our products, or our reputation and
could result in a significant decline in our operations and/or the number of our independent associates. Specifically, we are
susceptible to adverse or negative publicity regarding:
the nutritional supplements industry;
skeptical consumers;
27
competitors;
the safety and quality of our products and/or our ingredients;
regulatory investigations of our products or our competitors’ products;
the actions of our independent associates;
the direct selling/network marketing industry; and
scandals within the industries in which we operate.
For instance, on July 5, 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel
L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and
the Texas Food, Drug and Cosmetic Act. We subsequently reached an agreement with the Texas Attorney General’s office
settling an enforcement action against us, our former Chief Executive Officer and Chairman of the Board, Samuel L. Caster,
and others. Without admitting any wrongdoing, we agreed to refund up to $4 million to certain members and pay $2 million
to cover fees and expenses of Texas regulators. The settlement did not include any fine or penalty against the Company. We
have also taken a number of actions to address concerns raised by the Texas Attorney General’s action. Although the matter
has been resolved, the lawsuit created a substantial amount of adverse publicity that may have had and may continue to have
a negative impact on our business.
25. If our information technology system fails, our operations could suffer.
Like many companies, our business is heavily dependent upon our information technology infrastructure to
effectively manage and operate many of our key business functions, including:
order processing;
supply chain management;
customer service;
product distribution;
commission processing;
cash receipts and payments; and
financial reporting.
These systems and operations are vulnerable to damage and interruption from fires, earthquakes,
telecommunications failures, and other events. They are also subject to break-ins, sabotage, intentional acts of vandalism and
similar misconduct. Although we maintain an extensive security system and disaster recovery program that was developed
under the guidelines published by the National Institute of Standards of Technology, a long-term failure or impairment of
any of our information technology systems could adversely affect our ability to conduct day-to-day business.
26. Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties,
interest, and penalties in material amounts, which could harm our business.
As a multinational corporation, in many countries, including the United States, we are subject to transfer pricing and
other tax regulations designed to ensure that our intercompany transactions are consummated at prices that have not been
manipulated to produce a desired tax result, that appropriate levels of income are reported as earned by the local entities, and
that we are taxed appropriately on such transactions. Regulators closely monitor our corporate structure, intercompany
transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transfer
pricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase.
A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our
worldwide earnings and such change could be significant to our financial results. In the event any audit or assessments are
concluded adversely to us, these matters could have a material impact on our financial condition.
27. Currency exchange rate fluctuations could reduce our overall profits.
In 2012 and 2011, we recognized 59.2% and 58.2%, respectively, of net sales in markets outside of the United
States. In preparing our consolidated financial statements, certain financial information is required to be translated from
foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United
28
States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net
income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate
the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging
contracts or participated in any hedging or derivative activities.
28. Our stock price is volatile and may fluctuate significantly.
The price of our common stock is subject to sudden and material increases and decreases. Decreases could
adversely affect investments in our common stock. The price of our common stock and the price at which we could sell
securities in the future could significantly fluctuate in response to:
broad market fluctuations and general economic conditions;
fluctuations in our financial results;
future securities offerings;
changes in the market’s perception of our products or our business, including false or negative publicity;
governmental regulatory actions;
the outcome of any lawsuits;
financial and business announcements made by us or our competitors;
the general condition of the industry; and
the sale of large amounts of stock by insiders.
In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have
significantly affected the quoted prices of the securities of many companies. The changes sometimes appear to occur without
regard to specific operating performance. The price of our common stock in the open market could fluctuate based on factors
that have little or nothing to do with us or that are outside of our control.
29. Certain shareholders, directors, and officers own a significant amount of our stock, which could allow
them to influence corporate transactions and other matters.
As of December 31, 2012, our directors, executive officers, and a major shareholder, collectively with their families
and affiliates, beneficially owned approximately 35.8% of our total outstanding common stock. As a result, if two or more of
these shareholders choose to act together based on their current share ownership, they may be able to control a significant
percentage of the total outstanding shares of our common stock, which could affect the outcome of a shareholder vote on the
election of directors, the adoption of stock option plans, the adoption or amendment of provisions in our articles of
incorporation and bylaws, or the approval of mergers and other significant corporate transactions.
30. We have implemented anti-takeover provisions that may help discourage a change of control.
Certain provisions in our articles of incorporation, bylaws, and the Texas Business Organizations Code help
discourage unsolicited proposals to acquire our Company, even if the proposal may benefit our shareholders. Our articles of
incorporation authorize the issuance of preferred stock without shareholder approval. Our Board of Directors has the power
to determine the price and terms of any preferred stock. The ability of our Board of Directors to issue one or more series of
preferred stock without shareholders’ approval could deter or delay unsolicited changes of control by discouraging open
market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock. Discouraging
open market purchases may be disadvantageous to our shareholders who may otherwise desire to participate in a transaction
in which they would receive a premium for their shares.
In addition, other provisions may also discourage a change of control by means of a tender offer, open market
purchase, proxy contest or otherwise. Our charter documents provide for three classes of directors on our Board of Directors
with members of each class serving staggered three year terms. In addition, the Texas Business Organization Code restricts,
subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of these provisions could delay,
deter or help prevent a takeover of our Company and could limit the price investors are willing to pay for our common stock.
29
31. Our failure to comply with the NASDAQ Global Select Market continued listing standards may adversely
affect the price and liquidity of our shares of common stock as well as our ability to raise capital in the
future.
Our common stock is currently listed on the NASDAQ Global Select Market. Continued listing of a security on
Nasdaq is conditioned upon compliance with various continued listing standards. There can be no assurance that we will
continue to satisfy the requirements for maintaining listing on Nasdaq. If we are unsuccessful in maintaining compliance
with the continued listing requirements of Nasdaq, then our common stock could be delisted. If our common stock is delisted
and we cannot obtain listing on another major market or exchange, our common stock’s liquidity would suffer, and we would
likely experience reduced investor interest. Such factors may result in a decrease in our common stock’s trading price.
Delisting may also restrict us from issuing additional securities or securing financing.
To continue to have our common stock eligible for continued listing on Nasdaq, we would need to satisfy criteria
under at least one of the three standards set forth by the Nasdaq Stock Market. Under Equity Standard Listing Rules 5450(a)
and 5450(b)(1), these criteria require that:
we have shareholders’ equity of at least $10 million;
our common stock has at least $1.00 minimum bid for 30 consecutive business days;
our public float must consist of at least 750,000 shares with a market value of at least $5 million (public
float is defined under Nasdaq’s rules as the shares held by persons other than officers, directors and
beneficial owners of greater than 10% of our total outstanding shares);
there be at least 400 shareholders;
there be at least two market makers for our common stock; and
we comply with certain corporate governance requirements.
As of the date of issuance of this report, we were in compliance with these continued listing requirements. However,
we cannot assure you that we will be successful in continuing to meet all requisite continued listing criteria.
32. We are not required to pay dividends, and our Board of Directors may decide not to declare dividends in
the future.
The declaration of dividends on our common stock is solely within the discretion of our Board of Directors, subject
to limitations under Texas law stipulating that dividends may not be paid if payment therefore would cause the corporation to
be insolvent or if the amount of the dividend would exceed the surplus of the corporation. Our Board of Directors may decide
not to declare dividends or we could be prevented from declaring a dividend because of legal or contractual restrictions. The
failure to pay dividends could reduce our stock price. Our Board of Directors suspended dividends in August 2009. We may
not resume payment of dividends in the future.
33. We rely upon our existing cash balances and cash flow from operations to fund our business. In the event
that we do not generate adequate cash flow from operations, we will need to raise money through a debt or
equity financing, if available, or curtail operations.
The adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our
ability to increase product sales and/or reduce operating costs. If we are unsuccessful in generating positive cash flow from
operations, we could exhaust our available cash resources and be required to secure additional funding through a debt or
equity financing, significantly scale back our operations, and/or discontinue many of our activities which could negatively
affect our business and prospects. Additional funding may not be available or may only be available on unfavorable terms.
34. Our Equity Line with Dutchess may not be available to us if we elect to make a draw down.
On September 16, 2010, we entered into an Investment Agreement (the “Investment Agreement”) with Dutchess
Opportunity Fund II, LP, a Delaware limited partnership ( “Dutchess”). Pursuant to the Investment Agreement, Dutchess
committed to purchase, subject to certain restrictions and conditions, up to $10,000,000 of our common stock, over a period
of 36 months from the first trading day following the effectiveness of the registration statement registering the resale of
shares purchased by Dutchess pursuant to the Investment Agreement (the “Equity Line”). Dutchess will not be obligated to
purchase shares under the Equity Line unless certain conditions are met, which include: effectiveness of the registration
30
statement; the continued listing of our stock on the NASDAQ Global Select Market; our compliance with our obligations
under the Investment Agreement and Registration Rights Agreement entered into with Dutchess; the absence of injunctions
or other governmental actions prohibiting the issuance of common stock to Dutchess; the absence of violations of
shareholder approval requirements with respect to such issuance of our common stock to Dutchess; the accuracy of
representations and warranties made to Dutchess; and approval of the Equity Line transaction by our board of directors. If we
are unable to access funds through the Equity Line, we may be unable to access capital on favorable terms or at all.
35. Any draw downs under our Equity Line with Dutchess may result in dilution to our shareholders.
If we sell shares to Dutchess under the Equity Line, it will have a dilutive effect on the holdings of our current
shareholders, and may result in downward pressure on the price of our common stock. If we draw down amounts under the
Equity Line, we will issue shares to Dutchess at a discount of up to 4% from the average price of our common stock. If we
draw down amounts under the Equity Line when our share price is decreasing, we will need to issue more shares to raise the
same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater
dilutive effect than if our share price were stable or increasing and may further decrease our share price.
36. The reduced disclosure requirements applicable to us as a "smaller reporting company" may make our
common stock less attractive to investors.
We are a "smaller reporting company" as defined in Rule 12b-2 of the Exchange Act. As a smaller reporting
company we prepare and file SEC forms similar to other SEC reporting companies; however, the information disclosed may
differ and be less comprehensive. If some investors find our common stock less attractive as a result of less comprehensive
information we may disclose pursuant to the exemptions available to us as a smaller reporting company, there may be a less
active trading market for our common stock and our stock price may be more volatile than that of an otherwise comparable
company that does not avail itself of the same or similar exemptions.
Circumstances and conditions may change. Accordingly, additional risks and uncertainties not currently known, or
that we currently deem not material, may also adversely affect our business operations.
31
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease property at several locations for our headquarters and distribution facilities, including:
Size
110,000 sq. feet
75,000 sq. feet
850 sq. meters(1)
3,240 sq. feet
296 Tsubos(2)
717 Pyong (3)
254 Pings (4)
680 sq. meters(5)
3,097 sq. feet
1,963 sq. feet
383 sq. meters(6)
36 sq. meters(7)
1550 sq. meters(8)
179 sq. meters(9)
280 sq. meters(10)
Expiration
date
March 2018
March 2018
August 2013
August 2017
March 2013
June 2013
April 2013
November 2013
September 2014
September 2017
March 2015
Monthly
February 2016
November 2015
January 2014
Location
Coppell, Texas (corporate headquarters)
Coppell, Texas (distribution center)
St. Leonards, Australia (Australian headquarters)
Didcot, Oxfordshire (U.K. headquarters)
Minato-ku, Tokyo, Japan (Japanese headquarters)
Ganganm-gu, Seoul, Korea (Republic of Korea headquarters)
Taipei, Taiwan (Taiwan headquarters)
Zug, Switzerland (Switzerland headquarters)
Markham, Ontario (Canada headquarters)
Richmond, BC (Canada training center)
Bedfordview, South Africa (Office)
Cape Province, South Africa (Office)
Guadalajara, Mexico (customer service center)
Mexico City, Mexico (customer service center)
Monterrey, Mexico (customer service center)
______________________
(1) Approximately 9,150 square feet.
(2) Approximately 10,533 square feet.
(3) Approximately 25,514 square feet.
(4) Approximately 9,037 square feet.
(5) Approximately 7,320 square feet.
(6) Approximately 4,123 square feet.
(7) Approximately 388 square feet.
(8) Approximately 16,685 square feet.
(9) Approximately 1,927 square feet.
(10) Approximately 3,014 square feet.
To maximize our operating strategy and minimize costs, we contract with third-party distribution and fulfillment
facilities in our three regions: (i) North America: (ii) EMEA and (iii) Asia/Pacific. By entering into these third-party
distribution facility agreements, our offices maintain flexible operating capacity, minimize shipping costs, and are able to
process an order within 24-hours after order placement and receipt of payment.
Our main distribution facility is located in Coppell, Texas and consists of 75,000 square feet of leased space that
houses an automated distribution system capable of processing up to 18,000 orders per day. In July 2012, the Company
entered into a Sublease Agreement with Integrated Distribution and Logistics Direct, LLC (doing business as SPExpress)
whereby the Company began subleasing a majority of the Coppell distribution facility to SPExpress. Pursuant to a services
agreement and the sublease, SPExpress provides the Company warehousing and distribution services for its United States
distribution.
In July 2012, the Company entered into a Logistics Service Agreement with CEVA Logistics Netherlands B.V.
whereby the Company began outsourcing the warehousing, transportation and distribution of the Company’s products in the
EMEA region. In connection with this arrangement, we closed our distribution center in the United Kingdom.
Item 3. Legal Proceedings
See “Litigation” in Note 13 of the Notes to our Consolidated Financial Statement, which is incorporated herein by
reference.
32
Item 4. Mine Safety Disclosures
Not Applicable.
33
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Market for Our Common Stock. On February 12, 1999, we completed our initial public offering. Our common stock is
currently trading on the NASDAQ Global Select Market under the symbol “MTEX.” Effective January 13, 2012, we
amended our Amended and Restated Articles of Incorporation to effect a reverse stock split of our common stock at a ratio of
1-for-10. The primary purpose of the reverse stock split was to increase the per-share market price of our common stock in
order to maintain our listing on Nasdaq. As of March 22, 2013, we had an aggregate of 2,647,735 shares of our common
stock outstanding and the closing price on such date was $6.10. Below are the high and low closing prices of our common
stock as reported on the Nasdaq for each quarter of the fiscal years ended December 31, 2012 and 2011, as adjusted for the 1-
for-10 reverse stock split:
2012:
2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Low
3.55
3.35
5.12
4.80
16.20
9.30
5.30
4.00
$
$
$
$
$
$
$
$
High
4.90
7.00
7.68
7.74
20.60
17.50
9.70
7.90
$
$
$
$
$
$
$
$
Holders. As of March 22, 2013, there were 1,298 shareholders of record.
Dividends. In the third quarter of 2009, our Board of Directors suspended the quarterly cash dividend payment to
shareholders due to the Company’s financial performance, protracted worldwide economic recession, and the internal
funding needs of new initiatives designed to accelerate sales and associate recruitment. See “Risk Factors—We are not
required to pay dividends, and our Board of Directors may decide not to declare dividends in the future” in Item 1A of this
Form 10-K for further discussion related to future payment of dividends.
Sales of Unregistered Securities.
None.
Uses of Proceeds from Registered Securities.
None.
Issuer Purchases of Equity Securities.
None.
Item 6. Selected Financial Data
Not applicable for a Smaller Reporting Company
34
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist in the understanding of our consolidated financial position and our
results of operations for each of the two years ended December 31, 2012 and 2011. This discussion should be read in
conjunction with “Item 15. – Consolidated Financial Statements and related notes,” beginning on page F-1 of this report and
with other financial information included elsewhere in this report. Unless stated otherwise, all financial information
presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech
and all of our subsidiaries on a consolidated basis.
COMPANY OVERVIEW
Since November 1993, we have continued to develop innovative, high quality, proprietary nutritional supplements,
topical and skin care products, and weight-management products that are sold through a global network marketing system.
We operate in three regions: (i) North America (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,
Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore and
Taiwan). In November 2012, the Company commenced the shipment of its products to the Ukraine and in December 2012,
the Company commenced the shipment of its products to Hong Kong. Our Switzerland office was created to manage certain
day-to-day business needs of non-North American markets.
We conduct our business as a single operating segment and primarily sell our products through a network of
approximately 229,000 active independent associates and members who had purchased our products and/or packs during the
last 12 months, who we refer to as current independent associates and members. New recruits and pack sales are leading
indicators for the long-term success of our business. New recruits include new independent associates and members
purchasing our packs and products for the first time. We operate as a seller of nutritional supplements, topical and skin care
products, and weight-management products through our network marketing distribution channels operating in twenty-one
countries. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each
of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross
margins.
Because we sell our products through network marketing distribution channels, the opportunities and challenges that
affect us most are: recruitment of new and retention of independent associates and members; entry into new markets and
growth of existing markets; niche market development; new product introduction; and investment in our infrastructure.
Current Economic Conditions and Recent Developments
We identified restoring sales volume, profitability and generating positive cash flow as goals for 2012. In an effort
to achieve these goals, the Company: (i) launched a new product during the second quarter of 2012; (ii) introduced a new
sales system to our independent associates intended to allow world-wide recruitment of both consumers and business
builders; and (iii) aggressively reduced operational expenses to maximize the effects of incremental revenue growth on
profitability and cash flow.
We introduced NutriVerus powder for sale on a global basis starting with the United States in the second quarter of
2012 and expanding globally during the third and fourth quarters. Also during the second quarter, we introduced our 4Free
Discount Program in the United States and Canada. We believe the introduction of NutriVerus powder and the discount
program were instrumental to the 26% increase in the number of new independent associates and members during 2012 as
compared to 2011. Although we had an increase in the number of new independent associates and members, we continued to
experience a decline in overall sales during 2012 due to the reduction in the number of existing independent associates,
which resulted in a decline in the number of orders processed during 2012. During 2011, sales declined primarily due to the
reduction in the number of new independent associates and the loss of existing independent associates, which resulted in a
decline in the number of orders processed during 2011.
During 2012, we outsourced our Company-operated warehouses in the Netherlands and the United States to third-
party logistics companies. We believe this will decrease shipping time to our independent associates and members, decrease
operational expenses and allow us to concentrate on our core competencies.
We continued our aggressive reduction of operational expenses that started in the second quarter of 2011. As
compared to 2011 expense levels, we were able to reduce our selling & administrative expenses by over $10 million and
35
reduce our other operating expenses by over $8 million. Our operating results have continued to improve on a quarterly
basis during 2012, and we expect this trend to continue into 2013.
In 2013, we believe our continued aggressive pursuit of profitability will be realized on a full year basis, as we
realized in the third and fourth quarters of 2012. In order to achieve full year profitability, we are planning to launch formal
operations in two new countries, Hong Kong and the Ukraine; revise our global compensation strategy for our independent
associates; and continue to increase our operational efficiencies. We believe these strategies will allow the Company to
operate profitably and provide an opportunity to reverse a declining sales trend in order to achive incremental growth in cash
flow.
36
RESULTS OF OPERATIONS
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the
years ended December 31, 2012 and 2011 (in thousands, except percentages).
Net sales
Cost of sales
Gross profit
Operating expenses:
Commissions and incentives
Selling and administrative expenses
Depreciation and amortization
Other operating costs
Total operating expenses
Loss from operations
Interest income
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
2012
2011
Change
Total
Dollars
$ 173,447
34,641
% of
net sales
100.0 %
20.0 %
138,806 80.0 %
Total
dollars
$ 200,689
38,515
162,174
% of
net sales
100.0 %
19.1 %
80.9 %
Dollar
$ (27,242 )
(3,874 )
(23.368 )
Percentage
(13.6 )%
(10.1 )%
(14.4 )%
73,823
37,176
4,755
24,032
139,786
(980 )
50
630
(300 )
(1,088 )
(1,388 )
$
42.6 %
21.4 %
2.7 %
13.9 %
80.6 %
(0.6 )%
— %
0.4 %
(0.2 )%
(0.6 )%
(0.8 )%
87,426
47,821
10,697
33,119
179,063
(16,889 )
117
(1,106 )
(17,878 )
(2,781 )
(20,659 )
(13,603 )
43.6 %
(10,645 )
23.8 %
(5,942 )
5.3 %
(9,087 )
16.6 %
(39,277 )
89.3 %
15,909
(8.4 )%
(67 )
0.1 %
(0.6 )%
1,736
17,578
(8.9 )%
(1.4 )%
1,693
(10.3 )% $ 19,271
(15.6 )%
(22.3 )%
(55.5 )%
(27.4 )%
(21.9 )%
94.2 %
(57.3 )%
157.0 %
98.3 %
60.9 %
93.3 %
$
37
Consolidated net sales by region for the years ended December 31, 2012 and 2011 were as follows (in millions,
except percentages):
Net Sales in Dollars and as a Percentage of Consolidated Net Sales
North America
Asia/Pacific
EMEA
Total
Net Sales
2012
2011
$
$
86.5
70.6
16.3
173.4
49.9 %
40.7 %
9.4 %
100.0 %
$
$
101.9
81.4
17.4
200.7
50.8 %
40.6 %
8.6 %
100.0 %
For the year ended December 31, 2012, our operations outside of North America accounted for approximately
50.1% of our consolidated net sales, whereas in the same period in 2011, our operations outside of North America accounted
for approximately 49.2% of our consolidated net sales.
Consolidated net sales for the year ended December 31, 2012 decreased by $27.3 million, or 13.6%, to $173.4
million, as compared to $200.7 million for the same period in 2011. North America sales decreased by $15.4 million, or
15.1%, to $86.5 million as compared to $101.9 million for the same period in 2011. Asia/Pacific sales decreased by $10.8
million, or 13.3%, to $70.6 million as compared to $81.4 million for the same period in 2011. EMEA sales decreased by $1.1
million, or 6.3%, to $16.3 million as compared to $17.4 million for the same period in 2011.
Fluctuation in foreign currency exchange rates had an overall unfavorable impact on our net sales of approximately
$2.1 million for year ended December 31, 2012. The net sales impact is calculated as the difference between (1) the current
period’s net sales in USD and (2) the current period’s net sales in local currencies converted to USD by applying average
exchange rates for the year ended December 31, 2011.
Our total sales and sales mix could be influenced by any of the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in our sales prices;
changes in consumer demand;
changes in the number of independent associates and members;
changes in competitors’ products;
changes in economic conditions;
changes in regulations;
announcements of new scientific studies and breakthroughs;
introduction of new products;
discontinuation of existing products;
adverse publicity;
changes in our commissions and incentives programs;
direct competition; and
fluctuations in foreign currency exchange rates.
Our sales mix for the years ended December 31, was as follows (in millions, except percentages):
Consolidated product sales
Consolidated pack sales
Consolidated other, including freight
Total consolidated net sales
Change
2012
2011
Dollar
Percentage
$
$
155.8
11.4
6.2
173.4
$
$
171.5
21.3
7.9
200.7
$
$
(15.7 )
(9.9 )
(1.7 )
(27.3 )
(9.2 )%
(46.5 )%
(21.5 )%
(13.6 )%
38
Pack sales correlate to new independent associates who purchase starter packs and to continuing independent
associates who purchase upgrade or renewal packs. However, there is no direct correlation between product sales and the
number of new and continuing independent associates and members because independent associates and members utilize
products at different volumes.
Product Sales
Substantially all of our product sales are made to independent associates at published wholesale prices. We also sell
our products to independent members at discounted published retail prices.
Product sales for the year ended December 31, 2012 decreased by $15.7 million, or 9.2% to $155.8 million as
compared to $171.5 million for the same period in 2011. The decrease in product sales was primarily due to the reduction in
the number of existing associates, which resulted in a decline in the number of orders processed during 2012. The average
order value for the year ended December 31, 2012 was $172, as compared to $157 for the same period in 2011. The 9.6%
increase in average order value resulted in approximately $13.9 million in additional revenue, which partially offset the
overall decline in product sales. The number of orders placed during the year ended December 31, 2012 decreased by 16.7%
as compared to the same period in 2011.
Pack Sales
Packs may be purchased by our independent associates who wish to build a Mannatech business. These packs are
offered to our independent associates at a discount from published retail prices. There are several pack options available to
our independent associates. In certain markets, pack sales are completed during the final stages of the registration process
and can provide new independent associates with valuable training and promotional materials, as well as products for resale
to retail customers, demonstration purposes, and personal consumption. Business-building independent associates can also
purchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and
eligibility for additional commissions and incentives. Many of our business-building independent associates also choose to
purchase renewal packs to satisfy annual renewal requirements to continue to earn various commissions.
The dollar amount of pack sales associated with new and continuing independent associates was as follows, for the
years ended December 31 (in millions, except percentages):
New
Continuing
Total
Change
2012
2011
Dollar
Percentage
$
7.7
3.7
$
14.9
$
6.4
$
11.4
$
21.3
$
(7.2)
(2.7)
(9.9)
(48.3) %
(42.2) %
(46.5) %
Total pack sales for the year ended December 31, 2012 decreased by $9.9 million, or 46.5%, to $11.4 million, as
compared to $21.3 million for the same period in 2011. Average pack value for the year ended December 31, 2012 was $157,
as compared to $242 for the same period in 2011. The total number of packs sold decreased by 17.6% and the average pack
value decreased by $85 or 35.1% for the year ended December 31, 2012, as compared to the same period in 2011. The
decrease in the average pack value is due to a change in the sales mix of the type of packs purchased. Approximately $6.2
million of the reduction in pack sales resulted from the decrease in average pack value, with the remaining decrease
attributable to the decline in the number of packs sold during the period.
The approximate number of active new and continuing independent associates and members who purchased our
packs or products during the twelve months ended December 31 was as follows:
New
Continuing
Total
2012
97,000
132,000
229,000
42 %
58 %
100 %
2011
77,000
152,000
229,000
34 %
66 %
100 %
Overall, the combined number of active new and continuing associates did not change from the year ended
December 31, 2011 to 2012. However, we experienced a 26% increase in active new associates and members over the past
39
twelve months offset by a 13% decline in the number of active continuing independent associates and members over the past
twelve months.
During 2011 and 2012, we took the following actions to help increase the number of independent associates and
members:
•
•
•
•
•
•
•
•
registered our most popular products with the appropriate regulatory agencies in all countries of operations;
explored new international markets;
launched an aggressive marketing and educational campaign;
continued to strengthen compliance initiatives;
concentrated on publishing results of research studies and clinical trials related to our products;
initiated additional incentives;
explored new advertising and educational tools to broaden name recognition; and
implemented changes to our global associate career and compensation plan.
Other Sales
Other sales consisted of: (i) freight revenue charged to our independent associates and members; (ii) sales of
promotional materials; (iii) monthly fees collected for Success Tracker™ and Navig8™ customized electronic business-
building and educational materials, databases and applications; (iv) training and event registration fees; and (v) a reserve for
estimated sales refunds and returns. Promotional materials, training, database applications and business management tools
support our independent associates, which in turn helps stimulate product sales.
For the year ended December 31, 2012, other sales decreased by $1.7 million, or 21.5%, to $6.2 million, as
compared to $7.9 million for the same period in 2011. The decrease was primarily due to a decrease in freight fees for
product and pack shipments. Total revenue from freight and shipping fees were approximately $6.2 million and $7.8 million
for the years ended December 31, 2012 and 2011, respectively.
Gross Profit
For the year ended December 31, 2012, gross profit decreased by $23.4 million, or 14.4%, to $138.8 million, as
compared to $162.2 million for the same period in 2011. For the year ended December 31, 2012, gross profit as a percentage
of net sales decreased slightly to 80.0% as compared to 80.9% for the year ended December 31, 2011. The reduction in gross
profit for the year ended December 31, 2012 was primarily due to the decline in sales and an increase in product costs from
suppliers.
To improve the matching of costs associated with revenue from freight and shipping fees, freight costs associated
with shipping products to our customers were reclassified to costs of sales from selling and administrative expenses. Total
freight costs included in cost of sales were approximately $7.2 million and $7.9 million for the years ended December 31,
2012 and 2011, respectively. Additionally, to more closely conform to the financial presentations of our competitors, royalty
costs were reclassified to costs of sales from selling and administrative expenses. Total royalty costs included in cost of sales
were approximately $0.3 million and $0.2 million for the years ended December 31, 2012 and 2011, respectively.
Commission and Incentives
In order to more closely conform to the financial presentations to our competitors, commission and incentive
expenses were reclassified to operating expenses from costs of sales. Total commission and incentive expenses reclassified to
operating expenses were approximately $73.8 million and $87.4 million for the years ended December 31, 2012 and 2011,
respectively.
Commission costs decreased for the year ended December 31, 2012, by 15.4%, or $12.9 million, to $70.7 million, as
compared to $83.6 million for the same period in 2011. The decrease in commissions was due to the decrease in
commissionable net sales. For the year ended December 31, 2012, commissions as a percentage of net sales decreased to
40.8% as compared to 41.7% for the same period of 2011 primarily resulting from the decline in pack sales that earn a higher
rate of commission.
40
Incentive costs increased for the year ended December 31, 2012 by 18.4%, or $0.7 million, to $3.1 million, as
compared to $3.8 million for the same period in 2011. The costs of incentives, as a percentage of net sales, remained
relatively flat at 1.8% for the year ended December 31, 2012, as compared to 1.9% for the same period in 2011.
Selling and Administrative Expenses
Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses
consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses, such as
monthly magazine development costs and costs related to hosting our corporate-sponsored events.
For the year ended December 31, 2012, overall selling and administrative expenses decreased by $10.6 million, or
22.3%, to $37.2 million, as compared to $47.8 million for the same period in 2011. Selling and administrative expenses, as a
percentage of net sales decreased to 21.4%, as compared to 23.8% for the same period of 2011. The decrease in selling and
administrative expenses consisted of an $8.5 million decrease in payroll and payroll-related costs, a $1.3 million decrease in
contract labor costs, a $0.6 million decrease in marketing costs, a $0.1 million decrease in stock-based compensation expense
and a $0.1 million decrease in distribution expenses associated with third-party distribution facility services agreements.
Other Operating Costs
Other operating costs include travel, accounting/legal/consulting fees, credit card processing fees, banking fees, off-
site storage fees, utilities, and other miscellaneous operating expenses. Changes in other operating costs are associated with
the changes in our net sales.
For the year ended December 31, 2012, other operating costs decreased by $9.1 million, or 27.4%, to $24.0 million,
as compared to $33.1 million for the same period in 2011. For the year ended December 31, 2012, other operating costs, as a
percentage of net sales, were 13.9 %, as compared to 16.6 % for the same period in 2011. The decrease in other operating
costs was primarily due to a $2.0 million settlement expense with one of our raw materials suppliers incurred in 2011 that
was not replicated in 2012, coupled with reductions in office and repair expenses of $2.0 million, a reduction for
transactional sales tax expense accruals of $0.9 million relating to the expiration of certain statutes of limitations, credit card
fees of $0.8 million, legal and consulting fees of $0.7 million, travel and entertainment expenses of $0.6 million and other
expense reductions amounting to $0.6 million. For more information regarding the settlement expense, see Note 13
“Litigation”, to our consolidated financial statements.
Additionally, the Company reduced the accrued present value of the estimated future royalty payments related to the
post-employment royalty benefit payable to Dr. McAnalley. The decline in the royalty liability was associated with a decline
in estimated annual global product sales in excess of $105.4 million that reduced estimated future royalty payments. The
Company recorded a reduction to the long-term accrued royalty liability in the fourth quarter of 2012 favorably impacting
other operating expenses by $0.8 million. For more information regarding the long-term accrued royalty liability, see Note 1
to our consolidated financial statements “Organization and Summary of Significant Accounting Policies, Other Long-Term
Liabilities”.
Depreciation and Amortization Expense
For the year ended December 31, 2012, depreciation and amortization expense was $4.8 million, as compared to
$10.7 million for the same period in 2011. As a percentage of net sales, depreciation and amortization expense decreased to
2.7% from 5.3% for the same period in 2011, primarily due to the completion of depreciation in March 2012 for our
enterprise resource system placed in service in April 2007.
41
Provision for Income Taxes
Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations.
Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31:
Country
Australia
Canada
Denmark
Japan
Mexico
Norway
Republic of Korea
Singapore
South Africa
Sweden
Switzerland
Taiwan
United Kingdom
United States
2012
30.0 %
26.0 %
25.0 %
42.0 %
30.0 %
28.0 %
22.0 %
17.0 %
28.0 %
26.3 %
16.2 %
17.0 %
24.0 %
37.5 %
2011
30.0 %
28.0 %
25.0 %
42.0 %
30.0 %
28.0 %
22.0 %
17.0 %
28.0 %
26.3 %
16.2 %
17.0 %
26.0 %
37.5 %
Income from our international operations is subject to taxation in the countries in which we operate. Although we may
receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not
be able to utilize our foreign income tax credits in the United States.
We use the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes (“Topic 740”) to
account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more
likely than not” criterion for realizing 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. 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, 2012 and 2011, we maintained 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.
Country
Mexico
Norway
Sweden
Switzerland
Taiwan
United States
Total
2012
2.3
0.2
0.1
1.0
1.2
3.7
8.5
$
$
2011
1.9
0.2
0.1
0.8
1.1
5.4
9.5
$
$
The dollar amount of the provisions for income taxes is directly related to our results of operations and changes in
taxable income among countries. For the years ended December 31, 2012 and 2011, our effective tax rate was (363.08) %
and (15.6)%, respectively. For 2012 and 2011, we had a provision for income tax despite the pre-tax losses primarily
because of increases in the valuation allowance for deferred tax assets, increases in uncertain income tax positions, and
differences from foreign operations.
42
SEASONALITY
We believe the impact of seasonality on our consolidated results of operations is minimal. We have experienced and
believe we will continue to experience variations on our quarterly results of operations in response to, among other things:
the timing of the introduction of new products and incentives;
our ability to attract and retain associates and members;
the timing of our incentives and contests;
the general overall economic outlook;
government regulations;
the outcome of certain lawsuits;
the perception and acceptance of network marketing; and
the consumer perception of our products and overall operations.
As a result of these and other factors, our quarterly results may vary significantly in the future. Period-to-period
comparisons should not be relied upon as an indication of future performance since we can give no assurances that revenue
trends in new markets, as well as in existing markets, will follow our historical patterns. The market price of our common
stock may also be adversely affected by the above factors.
43
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
As of December 31, 2012, our cash and cash equivalents decreased by 20.4%, or $3.7 million, to $14.4 million from
$18.1 million as of December 31, 2011. The majority of the decrease in cash and cash equivalents was primarily due to $2.8
million associated with the settlement of litigation in the first quarter of 2012.
Our principal operating use of cash is to pay for operating expenses, including commissions and incentives, capital
assets, inventory purchases, and international expansion, and to pay quarterly cash dividends. In August 2009, the quarterly
cash dividend was suspended and remained suspended as of December 31, 2012. We fund our business objectives,
operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt.
Working Capital
Working capital represents total current assets less total current liabilities. At December 31, 2012, our working
capital decreased by $0.8 million, or 6.7%, to $11.1 million from $11.9 million at December 31, 2011. The decrease in
working capital primarily related to a decrease in cash and cash equivalents.
Net Cash Flows
Our net consolidated cash flows consisted of the following, for the years ended December 31 (in millions):
Used in:
Operating activities
Investing activities
Financing activities
2012
2011
$
$
$
(1.2 )
(0.6 )
(1.1 )
$
$
$
(2.9 )
(0.6 )
(1.2 )
Our operating, investing, and financing activities are described in more detail below.
Operating Activities
For the years ended December 31, 2012 and 2011, our net operating activities used cash of $1.2 million and $2.9
million, respectively. For the years ended December 31, 2012 and 2011, net earnings adjusted for noncash activities
generated cash of $6.0 million, and used cash $6.1 million, respectively, and our working capital accounts used cash of $7.2
million, and provided cash of $3.3 million, respectively.
We will continue to aggressively identify opportunities and reduce operational expenses. We expect that our net
operating cash flows in 2013 will be sufficient to fund our current operations. There can be no assurance, however, that we
will continue to generate cash flows at or above current levels. Certain events, such as the uncertainty of the worldwide
economic environment, could impact our available cash or our ability to generate cash flows from operations.
Investing Activities
For the years ended December 31, 2012 and 2011, our net investing activities used cash of $0.6 million for each
year, respectively.
We had a net use of cash of $0.3 million and $0.7 million in 2012 and 2011, respectively, for the purchase and sale
of capital assets. We had an increase in restricted cash of $0.3 million and a decline of restricted cash of $0.1 million in 2012
and 2011, respectively.
Financing Activities
In 2012 and 2011, we used cash of $1.1 million and $1.2 million respectively, mainly attributable to the repayment
of capital lease obligations. No dividends were declared to shareholders for 2012 and 2011.
44
General Liquidity and Cash Flows
Short Term Liquidity
We believe our existing liquidity and anticipated return to positive cash flows from operations are adequate to fund
our normal expected future business operations and possible international expansion costs for the next 12 months. As our
primary source of liquidity is our cash flow from operations, this will be dependent on our ability to reverse the declining
revenue trend and/or continue to reduce operational expenses. However, if our existing capital resources or cash flows
become insufficient to meet current business plans, projections, and existing capital requirements, we may be required to
raise additional funds, which may not be available on favorable terms, if at all.
We entered into an Investment Agreement with Dutchess Opportunity Fund, II, LP, a Delaware limited partnership
on September 16, 2010. Dutchess committed to purchase, subject to certain restrictions and conditions, up to $10 million of
our common stock, over a period of 36 months from the first trading following the effectiveness of the registration statement,
which was October 28, 2010. We may draw funds from the Equity Line by selling shares of common stock to Dutchess from
time to time. We will not receive any proceeds from the resale of these shares of common stock offered by Dutchess. We will
however, receive proceeds from the sale of shares to Dutchess pursuant to the Equity Line. The proceeds will be used for
general working capital needs and for other general corporate purposes. For more information on the Equity Line, see Note
14 “Shareholders’ Equity”, to our consolidated financial statements. As of December 31, 2012, no shares of common stock
have been issued pursuant to the Investment Agreement.
We are engaged in ongoing audits in various tax jurisdictions and other disputes in the normal course of business. It
is impossible at this time to predict whether we will incur any liability, or to estimate the ranges of damages, if any, in
connection with these matters. Adverse outcomes on these uncertainties may lead to substantial liability or enforcement
actions that could adversely affect our cash position. For more information, see Note 8 “Income Taxes” and Note 13
“Litigation”, to our consolidated financial statements.
Long Term Liquidity
We believe our anticipated return to positive cash flows from operations should be adequate to fund our normal
expected future business operations and possible international expansion costs for the long term. As our primary source of
liquidity is from our cash flow from operations, this will be dependent on our ability to reverse the declining revenue trend
and/or continue to reduce operational expenses.
However, if our existing capital resources or cash flows become insufficient to meet anticipated business plans and
existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if
at all.
Our future access to the capital markets may be adversely impacted if we fail to maintain compliance with the
Nasdaq Marketplace Rules for the continued listing of our stock. We continuously monitor our compliance with the Nasdaq
continued listing rules and as of the date of the issuance of this report, we are in compliance with the Nasdaq Marketplace
Rules.
45
CONTRACTUAL OBLIGATIONS
The following summarizes our future commitments and obligations associated with various agreements and
contracts as of December 31, 2012, for the years ending December 31 (in thousands):
2013
2014
900 $ 548 $
2015
2016
349 $ 137 $
2017
$
Capital lease obligations
Purchase obligations(1) (2)
Operating leases
Post-employment royalty
Employment agreements
Royalty agreement
Tax liability (3)
Other long-term obligations
Total commitments and obligations $ 12,140 $ 4,477 $ 2,846 $ 1,341 $
3,949
2,253
32
1,285
84
2,875
762
2,201
1,141
66
—
84
131
306
1,200
1,035
33
—
66
33
130
324
839
—
—
—
—
41
12
—
781
—
—
—
—
35
828
$
Thereafter
$
Total
— $ 1,946
7,674
—
6,225
176
131
—
1,285
—
234
—
3,039
—
1,915
641
817 $ 22,449
_________________________
(1) For purposes of the table, a purchase obligation is defined as “an agreement to purchase goods or services that is non-cancelable, enforceable and
legally binding on the Company that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.”
(2) Excludes approximately $7.3 million of finished product purchase orders that may be cancelled or delivery dates changed as of December 31, 2012.
(3) Represents the tax liability associated with uncertain tax positions, see Note 8 to our consolidated financial statements, "Income Taxes".
We have maintained purchase commitments with certain raw material suppliers to purchase minimum quantities and
to ensure exclusivity of our raw materials and the proprietary nature of our products. Currently, we have two supply
agreements that require minimum purchase commitments. We also maintain other supply agreements and manufacturing
agreements to protect our products, regulate product costs, and help ensure quality control standards. These agreements do
not require us to purchase any set minimums. We have no present commitments or agreements with respect to acquisitions or
purchases of any manufacturing facilities; however, management from time to time explores the possibility of the benefits of
purchasing a raw material manufacturing facility to help control costs of our raw materials and help ensure quality control
standards.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements.
MARKET RISKS
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”). The application of GAAP requires us to make estimates and assumptions that affect
the reported values of assets and liabilities at the date of our financial statements, the reported amounts of revenues and
expenses during the reporting period, and the related disclosures of contingent assets and liabilities. We use estimates
throughout our financial statements, which are influenced by management’s judgment and uncertainties. Our estimates are
based on historical trends, industry standards, and various other assumptions that we believe are applicable and reasonable
under the circumstances at the time the consolidated financial statements are prepared. Our Audit Committee reviews our
critical accounting policies and estimates. We continually evaluate and review our policies related to the portrayal of our
consolidated financial position and consolidated results of operations that require the application of significant judgment by
our management. We also analyze the need for certain estimates, including the need for such items as allowance for doubtful
accounts, inventory reserves, long-lived fixed assets and capitalization of internal-use software development costs, reserve
for uncertain income tax positions and tax valuation allowances, revenue recognition, sales returns, and deferred revenues,
accounting for stock-based compensation, and contingencies and litigation. Historically, actual results have not materially
deviated from our estimates. However, we caution readers that actual results could differ from our estimates and assumptions
applied in the preparation of our consolidated financial statements. If circumstances change relating to the various
assumptions or conditions used in our estimates, we could experience an adverse effect on our financial position, results of
46
operations, and cash flows. We have identified the following applicable critical accounting policies and estimates as of
December 31, 2012:
Inventory Reserves
Inventory consists of raw materials, finished goods, and promotional materials that are stated at the lower of cost
(using standard costs that approximate average costs) or market. We record the amounts charged by the vendors as the costs
of inventory. Typically, the net realizable value of our inventory is higher than the aggregate cost. Determination of net
realizable value can be complex and, therefore, requires a high degree of judgment. In order for management to make the
appropriate determination of net realizable value, the following items are considered: inventory turnover statistics, current
selling prices, seasonality factors, consumer demand, regulatory changes, competitive pricing, and performance of similar
products. If we determine the carrying value of inventory is in excess of estimated net realizable value, we write down the
value of inventory to the estimated net realizable value.
We also review inventory for obsolescence in a similar manner and any inventory identified as obsolete is reserved
or written off. Our determination of obsolescence is based on assumptions about the demand for our products, product
expiration dates, estimated future sales, and general future plans. We monitor actual sales compared to original projections,
and if actual sales are less favorable than those originally projected by us, we record an additional inventory reserve or write-
down. Historically, our estimates have been close to our actual reported amounts. However, if our estimates regarding
inventory obsolescence are inaccurate or consumer demand for our products changes in an unforeseen manner, we may be
exposed to additional material losses or gains in excess of our established estimated inventory reserves. At December 31,
2012 and 2011, our inventory reserves were $1.6 million and $2.3 million, respectively.
Long Lived Fixed Assets and Capitalization of Software Development Costs
In addition to capitalizing long-lived fixed asset costs, we also capitalize costs associated with internally developed
software projects (collectively “fixed assets”) and amortize such costs over the estimated useful lives of such fixed assets.
Fixed assets are carried at cost less accumulated depreciation computed using the straight-line method over the assets’
estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining lease terms or the estimated
useful lives of the improvements. Expenditures for maintenance and repairs are charged to operations as incurred. If a fixed
asset is sold or otherwise retired or disposed of, the cost of the fixed asset and the related accumulated depreciation or
amortization is written off and any resulting gain or loss is recorded in other operating costs in our consolidated statement of
operations.
We review our fixed assets for impairment whenever an event or change in circumstances indicates the carrying
amount of an asset or group of assets may not be recoverable, such as plans to dispose of an asset before the end of its
previously estimated useful life. Our impairment review includes a comparison of future projected cash flows generated by
the asset, or group of assets, with its associated net carrying value. If the net carrying value of the asset or group of assets
exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the
carrying amount exceeds the fair value. The fair value is determined by calculating the discounted expected future cash flows
using an estimated risk-free rate of interest. Any identified impairment losses are recorded in the period in which the
impairment occurs. The carrying value of the fixed asset is adjusted to the new carrying value and any subsequent increases
in fair value of the fixed asset are not recorded. In addition, if we determine the estimated remaining useful life of the asset
should be reduced from our original estimate, the periodic depreciation expense is adjusted prospectively, based on the new
remaining useful life of the fixed asset.
The impairment calculation requires us to apply judgment and estimates concerning future cash flows, strategic
plans, useful lives, and discount rates. If actual results are not consistent with our estimates and assumptions, we may be
exposed to an additional impairment charge, which could be material to our results of operations. In addition, if accounting
standards change, or if fixed assets become obsolete, we may be required to write off any unamortized costs of fixed assets;
or if estimated useful lives change, we would be required to accelerate depreciation or amortization periods and recognize
additional depreciation expense in our consolidated statement of operations.
47
Historically, our estimates and assumptions related to the carrying value and the estimated useful lives of our fixed
assets have not materially deviated from actual results. As of December 31, 2012, the estimated useful lives and net carrying
values of fixed assets are as follows:
Office furniture and equipment
Computer hardware and software
Automobiles
Leasehold improvements
Total net carrying value at December 31, 2012
Estimated useful life
5 to 7 years
3 to 5 years
3 to 5 years
2 to 10 years(1)
Net carrying value at
December 31, 2012
$
$
1.1 million
1.5 million
0.1 million
2.1 million
4.8 million
_____________________________
(1)
We amortize leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term.
The net carrying costs of fixed assets 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 impairment existed during the
years ended December 31, 2012 and 2011.
Uncertain Income Tax Positions and Tax Valuation Allowances
As of December 31, 2012, we recorded $2.8 million in current liabilities and $0.2 million in other long-term
liabilities related to uncertain income tax positions. The decrease in other long-term liabilities as of December 31, 2012 is
based on the outcome of the hearing with the Appeals Division of the IRS concerning the 2005 thru 2009 tax years, allowing
for a reduction in our tax positions of approximately $1.1 million for tax years after 2009. As required by Topic 740, we use
judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions. We
base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will
“more likely than not” be sustained in an income tax audit. We are also subject to periodic audits from multiple domestic and
foreign tax authorities related to income tax, sales and use tax, personal property tax, and other forms of taxation. These
audits examine our tax positions, timing of income and deductions, and allocation procedures across multiple jurisdictions.
As part of our evaluation of these tax issues, we establish reserves in our consolidated financial statements based on our
estimate of current probable tax exposures. Depending on the nature of the tax issue, we could be subject to audit over
several years. Therefore, our estimated reserve balances and liability related to uncertain income tax positions may exist for
multiple years before the applicable statute of limitations expires or before the taxing authority resolves an issue.
Additionally, we may be requested to extend the statute of limitations for tax years under audit. The majority of current
liability related to uncertain income tax positions is associated with an ongoing Internal Revenue Service (IRS) audit. It is
reasonably possible the tax jurisdiction may request that the statute of limitations be extended, which may cause the
classification between current and long-term to change. We believe that our tax liabilities related to uncertain tax positions
are based upon reasonable judgment and estimates; however, if actual results materially differ, our effective income tax rate
and cash flows could be affected in the period of discovery or resolution.
We also review the estimates and assumptions used in evaluating the probability of realizing the future benefits of
our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may
not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a
valuation allowance. We use our history and experience, overall profitability, future management plans, and current
economic information to evaluate the amount of valuation allowance to record. As of December 31, 2012, we maintained a
valuation allowance for deferred tax assets arising from our operations of $8.5 million because they did not meet the “more
likely than not” criteria as defined by the recognition and measurement provisions of Topic 740. In addition, as of December
31, 2012, we had deferred tax assets, after valuation allowance, totaling $3.3 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.
Revenue Recognition and Deferred Revenue
We derive revenue from sales of individual products, sales of starter and renewal packs, and shipping fees.
Substantially all product and pack sales are made to independent associates at published wholesale prices and to members at
discounted published retail prices. We record revenue net of any sales taxes and records a reserve for expected sales returns
based on its historical experience.
48
We recognize revenue from shipped packs and products upon receipt by the customer. We recognize corporate-
sponsored event revenue when the event is held. We defer certain components of our revenue. At December 31, 2012 and
December 31, 2011, deferred revenue was $1.5 million and $1.6 million, respectively, and consisted primarily of revenue
received from: (i) sales of packs and products shipped but not received by the customers by period end; and (ii) prepaid
registration fees from customers planning to attend a future corporate-sponsored event.
We estimate a sales return reserve for expected sales refunds based on historical experience over a rolling six-month
period. If actual results differ from our estimated sales return reserve due to various factors, the amount of revenue recorded
each period could be materially affected. 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 averaged 1.5% or less of our gross sales. For the year ended December 31, 2012 our sales return reserve was composed
of the following (in thousands):
Sales reserve as of January 1, 2012
Provision related to sales made in 2012
Provision related to sales made prior to 2012
Actual returns or credits in 2012 related to 2012
Actual returns or credits in 2012 related to prior periods
Sales reserve as of December 31, 2012
$
$
528
1,487
(319 )
(1,316 )
(224 )
156
Accounting for Stock-Based Compensation
We grant stock options to our employees, board members, and consultants. At the date of grant, we determine the
fair value of a stock option award and recognize compensation expense over the requisite service period, or the vesting
period of such stock option award, which is two to four years. The fair value of the stock option award is calculated using the
Black-Scholes option-pricing model (the “calculated fair value”). The Black-Scholes option-pricing model requires us to
apply judgment and use highly subjective assumptions, including expected stock option life, expected volatility, expected
average risk-free interest rates, and expected forfeiture rates. For the year ended December 31, 2012, our assumptions and
estimates used for the calculated fair value of stock options granted in 2012 were as follows:
Estimated fair value per share of options granted:
Assumptions:
$
Annualized dividend yield
Risk-free rate of return
Common stock price volatility
Expected average life of stock options (in
years)
January
2012
grant
2.64 $
May
2012
grant
3.21
0.00 %
.75 %
78.4 %
0.00 %
.62 %
81.6 %
4.5
4.5
Historically, our estimates and underlying assumptions have not materially deviated from our actual reported results
and rates. However, we base assumptions we use on our best estimates, which involves inherent uncertainties based on
market conditions that are outside of our control. If actual results are not consistent with the assumptions we use, the stock-
based compensation expense reported in our consolidated financial statements may not be representative of the actual
economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our
estimated forfeitures, we may be required to adjust our consolidated financial statements in future periods. As of December
31, 2012, using our current assumptions and estimates, we anticipate recognizing $0.1 million in gross compensation expense
through 2014 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. Gross compensation
expense would equal the calculated fair value of such stock options, which is dependent on the assumptions used to calculate
such fair value, but ranges from 34% to 69% of the exercise price multiplied by the number of stock options awarded. As of
December 31, 2012, we had 148,434 shares available for grant in the future.
49
Contingencies and Litigation
Each quarter, we evaluate the need to establish a reserve for any legal claims or assessments. We base our
evaluation on our best estimates of the potential liability in such matters. The legal reserve includes an estimated amount for
any damages and the probability of losing any threatened legal claims or assessments. The legal reserve is developed in
consultation with our general and outside counsel and is based upon a combination of litigation and settlement strategies.
Although we believe that our legal reserves and accruals are based on reasonable judgments and estimates, actual results
could differ, which may expose us to material gains or losses in future periods. If actual results differ, if circumstances
change, or if we experience an unanticipated adverse outcome of any legal action, including any claim or assessment, we
would be required to recognize the estimated amount that could reduce net income, earnings per share, and cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
See “Recent Accounting Pronouncements” in Note 2 of the Notes to our Consolidated Financial Statements, which
is incorporated herein by reference.
50
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in trading market risk sensitive instruments and do not purchase investments as hedges or for
purposes “other than trading” that are likely to expose us to certain types of market risk, including interest rate, commodity
price, or equity price risk. Although we have investments, we believe there has been no material change in our exposure to
interest rate risk. We have not issued any debt instruments, entered into any forward or futures contracts, purchased any
options, or entered into any swap agreements.
We are exposed, however, to other market risks, including changes in currency exchange rates as measured against
the United States dollar. Because the change in value of the United States dollar measured against foreign currency may
affect our consolidated financial results, changes in foreign currency exchange rates could positively or negatively affect our
results as expressed in the United States dollars. For example, when the United States dollar strengthens against foreign
currencies in which our products are sold or weakens against foreign currencies in which we may incur costs, our
consolidated net sales or related costs and expenses could be adversely affected.
We believe inflation has not had a material impact on our consolidated operations or profitability. We expanded into
Canada in 1996, into Australia in 1998, into the United Kingdom in 1999, into Japan in 2000, into New Zealand in 2002, into
the Republic of Korea in 2004, into Taiwan and Denmark in 2005, into Germany in 2006, into South Africa and Singapore in
2008, into Austria, the Netherlands, Norway, and Sweden in 2009, into Mexico, the Czech Republic, Estonia, Finland,
Namibia and the Republic of Ireland in 2011and into Hong Kong and the Ukraine in 2012. We translate our revenues and
expenses in foreign markets using an average rate.
We maintain policies, procedures, and internal processes in an effort to help monitor any significant market risks
and we do not use any financial instruments to manage our exposure to such risks. We assess the anticipated foreign currency
working capital requirements of our foreign operations and maintain a portion of our cash and cash equivalents denominated
in foreign currencies sufficient to satisfy most of these anticipated requirements.
We caution that we cannot predict with any certainty our future exposure to such currency exchange rate
fluctuations or the impact, if any, such fluctuations may have on our future business, product pricing, operating expenses,
and on our consolidated financial position, results of operations, or cash flows. However, to combat such market risk, we
closely monitor our exposure to currency fluctuations. The regions and countries in which we currently have exposure to
foreign currency exchange rate risk include (i) North America (Canada and Mexico); (ii) EMEA (Austria, the Czech
Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, South Africa, Sweden,
Switzerland, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore,
and Taiwan). The current (spot) rate, average currency exchange rates, and the low and high of such currency exchange rates
as compared to the United States dollar, for each of these countries as of and for the year ended December 31, 2012 were as
follows:
Country (foreign currency name)
Australia (Dollar)
Austria, Germany, the Netherlands, Estonia, Finland,
and the Republic of Ireland (Euro)
Canada (Dollar)
Czech Republic (Koruna)
Denmark (Krone)
Japan (Yen)
Mexico (Peso)
New Zealand (Dollar)
Norway (Krone)
Republic of Korea (Won)
Singapore (Dollar)
South Africa (Rand)
Sweden (Krona)
Switzerland (Franc)
Taiwan (Dollar)
United Kingdom (British Pound)
Year ended December 31, 2012
As of December 31, 2012
Low
High
Average
Spot
1.0856
1.3486
1.0380
0.05813
0.1975
0.01315
0.07956
0.8476
0.18100
0.00094
0.8228
0.13510
0.1544
1.1196
0.03455
1.6308
0.9577
1.2042
0.9572
0.04464
0.1619
0.01154
0.06847
0.7452
0.16200
0.00082
0.7689
0.11090
0.1213
1.0027
0.03204
1.5232
51
1.0359
1.2861
1.0001
0.05122
0.1728
0.01254
0.07613
0.8104
0.17204
0.00089
0.8006
0.12227
0.1478
1.0671
0.03391
1.5851
1.0374
1.3218
1.0034
0.05274
0.1773
0.01165
0.07688
0.8201
0.17910
0.00094
0.8173
0.11800
0.1538
1.0949
0.03446
1.6168
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and Supplementary Data required by this Item 8 are set forth in Item 15 of
this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief
Financial Officer (principal financial officer), have concluded, based on their evaluation as of the end of the period covered
by this report, that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d – 15(e) under the
Exchange Act) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms and include controls and procedures designed to ensure that information required to be disclosed by us in such reports
is accumulated and communicated to our management, including our principal executive and financial officers, as
appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2012, there were no changes in our internal control over our financial
reporting that we believe materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
52
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a – 13(f) or Rule 15d-15(f) under the Exchange Act) for the Company. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting for external
purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over
financial reporting includes: maintaining records that in reasonable detail accurately and fairly reflect our transactions;
providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial
statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company
assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute
assurance that a misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2012.
53
Item 9B. Other Information
None.
Documents Incorporated by Reference
PART III
The information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K is incorporated by reference to the
definitive proxy statement for our annual meeting to be filed with the SEC within 120 days after December 31, 2012.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of the report:
1. Consolidated Financial Statements
The following financial statements and the Reports of Independent Registered Public Accounting Firms are
filed as a part of this report on the pages indicated:
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012 and 2011
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, December 31, 2012 and 2011
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-4
F-4
F-5
F-6
F-7
2. Financial Statement Schedule
The financial statement schedule required by this item is included as an Exhibit to this Annual Report on
Form 10-K.
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule.
3. Exhibit List
See Index to Exhibits following our Consolidated Financial Statements contained in this Annual Report on
Form 10-K.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: March 27, 2013
Dated: March 27, 2013
MANNATECH, INCORPORATED
By: /s/ Robert A. Sinnott
Robert A. Sinnott
Chief Executive Officer
By:
/s/ S. Mark Nicholls
S. Mark Nicholls
Chief Financial Officer
55
POWER OF ATTORNEY
The undersigned directors and officers of Mannatech, Incorporated hereby constitute and appoint Larry A. Jobe and
S. Mark Nicholls, and each of them, with the power to act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in fact and agents with full power to execute in our name and behalf in the
capacities indicated below any and all amendments to this report and to file the same, with all exhibits and other documents
relating thereto and hereby ratify and confirm all that such attorneys-in-fact, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities indicated:
Signature
Title
Date
/s/ Robert A. Sinnott
Robert A. Sinnott
/s/ S. Mark Nicholls
S. Mark Nicholls
/s/ J. Stanley Fredrick
J. Stanley Fredrick
/s/ Alan D. Kennedy
Alan D. Kennedy
/s/ Gerald E. Gilbert
Gerald E. Gilbert
/s/ Marlin Ray Robbins
Marlin Ray Robbins
/s/ Larry A. Jobe
Larry A. Jobe
/s/ Robert A. Toth
Robert A. Toth
Chief Executive Officer and Chief Science Officer
(principal executive officer)
Chief Financial Officer
(principal financial and accounting officer)
Chairman of the Board
Director
Director
Director
Director
Director
March 27, 2013
March 27, 2013
March 27, 2013
March 27, 2013
March 27, 2013
March 27, 2013
March 27, 2013
March 27, 2013
56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012 and 2011
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended December 31, December 31, 2012 and 2011
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-4
F-5
F-6
F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mannatech, Incorporated
Coppell, Texas
We have audited the accompanying consolidated balance sheets of Mannatech, Incorporated and Subsidiaries as of
December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive loss, shareholders’
equity, and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Mannatech, Incorporated and Subsidiaries at December 31, 2012 and 2011 and the results of their operations
and their cash flows for each of the two years in the period ended December 31, 2012 in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Dallas, Texas
March 27, 2013
F-2
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance of $20 and $22 in 2012 and 2011, respectively
Income tax receivable
Inventories, net
Prepaid expenses and other current assets
Deferred tax assets
Total current assets
Property and equipment, net
Construction in progress
Long-term restricted cash
Other assets
Long-term deferred tax assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current portion of capital leases
Accounts payable
Accrued expenses
Commissions and incentives payable
Taxes payable
Current deferred tax liability
Deferred revenue
Total current liabilities
Capital leases, excluding current portion
Long-term deferred tax liabilities
Other long-term liabilities
Total liabilities
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, 2,768,972 shares issued and 2,647,735
shares outstanding as of December 31, 2012 and 2,769,756 shares issued and 2,648,518 shares
outstanding as of December 31, 2011
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Less treasury stock, at cost, 121,237 shares in 2012 and 2011
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
December 31,
2012
2011
$
$
14,377 $
1,515
324
884
15,154
2,487
561
35,302
4,825
8
3,736
3,187
502
47,560 $
$
780 $
4,154
6,348
7,373
3,901
179
1,486
24,221
938
2
2,178
27,339
18,057
1,263
304
888
17,786
2,497
936
41,731
9,566
—
3,386
2,815
772
58,270
852
4,825
10,514
8,567
3,364
185
1,569
29,876
1,358
1
5,382
36,617
—
—
—
42,614
(6,920 )
(677 )
(14,796 )
20,221
47,560 $
—
42,408
(5,532 )
(427 )
(14,796 )
21,653
58,270
$
F-3
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
Net sales
Cost of sales
Gross profit
Operating expenses:
Commissions and incentives
Selling and administrative expenses
Depreciation and amortization
Other operating costs
Total operating expenses
Loss from operations
Interest income
Other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
Loss per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
For the years ended December 31,
$
2012
173,447
34,641
138,806
$
2011
200,689
38,515
162,174
73,823
37,176
4,755
24,032
139,786
(980 )
50
630
(300 )
(1,088 )
(1,388 )
(0.52 )
(0.52 )
2,648
2,648
87,426
47,821
10,697
33,119
179,063
(16,889 )
117
(1,106 )
(17,878 )
(2,781 )
(20,659 )
(7.80 )
(7.80 )
2,649
2,649
$
$
$
$
$
$
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Foreign currency translations (loss) gain
Pension obligations, net of tax (provision) of ($197) and benefit of $9 in 2012
and 2011, respectively
Comprehensive loss
For the years ended December 31,
2012
(1,388 )
(565 )
315
(1,638 )
$
$
2011
$ (20,659 )
893
(12 )
$ (19,778 )
See accompanying notes to consolidated financial statements.
F-4
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY
(in thousands)
Balance at January 1, 2011
$
Charge related to stock-based compensation
Repurchase of common stock
Foreign currency translation
Pension obligations, net of tax of $9
Net loss
Balance at December 31, 2011
$
Charge related to stock-based compensation
Repurchase of fractional shares from reverse
stock split
Foreign currency translation
Pension obligations, net of tax of $197
Net loss
Balance at December 31, 2012
$
Common
stock
Par value
Retained
earnings
(Accumulated
deficit)
Accumulated
other
comprehensive
loss
Treasury
stock
Total
shareholders’
equity
Additional
paid in
capital
— $ 42,052 $
—
—
—
—
—
— $ 42,408 $
—
356
—
—
—
—
209
—
—
—
—
— $ 42,614 $
(3 )
—
—
—
15,127 $
—
—
—
—
(20,659 )
(5,532 ) $
—
—
—
—
(1,388 )
(6,920 ) $
(1,308 ) $ (14,791 ) $
—
—
893
(12 )
—
—
(5 )
—
—
—
(427 ) $ (14,796 ) $
—
—
(565 )
315
—
—
—
—
—
—
(677 ) $ (14,796 ) $
41,080
356
(5 )
893
(12 )
(20,659 )
21,653
209
(3 )
(565 )
315
(1,388 )
20,221
See accompanying notes to consolidated financial statements.
F-5
MANNATECH, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31,
2012
2011
$
(1,388 )
$
(20,659 )
4,755
1,766
8
102
209
583
(40 )
4
1,065
610
(144 )
(646 )
(7,314 )
508
(1,186 )
(84 )
(1,192 )
(379 )
111
(336 )
(604 )
—
(3 )
(1,074 )
(1,077 )
(807 )
(3,680 )
18,057
14,377
10,697
3,660
61
136
356
(380 )
59
29
2,539
1,883
240
(730 )
565
(347 )
(622 )
(361 )
(2,874 )
(777 )
74
80
(623 )
(5 )
—
(1,160 )
(1,165 )
1,135
(3,527 )
21,584
$
18,057
876
171
57
237
$
$
$
$
480
167
787
—
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Provision for inventory losses
Provision for doubtful accounts
Loss on disposal of assets
Accounting charge related to stock-based compensation expense
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Income tax receivable
Inventories
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued expenses and other liabilities
Taxes payable
Commissions and incentives payable
Deferred revenue
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment
Proceeds from sales of assets
Change in restricted cash
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock
Repurchase of fractional shares from reverse stock split
Repayment of capital lease obligations
Net cash used in financing activities
Effect of currency exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid, net
Interest paid on capital leases
Summary of non-cash investing and financing activities:
Assets acquired through capital lease
Note receivable, net relating to sale of property and equipment
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-6
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Coppell, 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 products, and weight-management products. We currently sell our products into three regions: (i) North America
(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, Sweden, and the United Kingdom); (iii)
Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore and Taiwan). In November 2012, the
Company commenced the shipment of its products to the Ukraine and in December 2012, the Company commenced the
shipment of its products to Hong Kong.
Independent associates (“associates”) purchase the Company’s products at published wholesale prices to either sell
to retail customers or for personal use. Members purchase the Company’s products at a discount from published retail prices
primarily for personal use. The Company cannot distinguish products sold for personal use from other sales because it is not
involved with the products after delivery, other than usual and customary product warranties and returns. Only independent
associates are eligible to earn commissions and incentives.
On January 9, 2012, the Board of Directors passed a resolution to effect a 1-for-10 reverse stock split, which
became effective on January 13, 2012. Accordingly, common share and per share information have been retroactively
restated in these financial statements to reflect the reverse-stock split.
Principles of Consolidation
The consolidated financial statements and footnotes include the accounts of the Company and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the
current year presentation.
Use of Estimates
The preparation of the Company’s consolidated financial statements in accordance with generally accepted
accounting principles 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.
Foreign Currency Translation
The United States dollar is the functional currency for the majority of the Company’s foreign subsidiaries. As a
result, nonmonetary assets and liabilities are translated at their approximate historical rates, monetary assets and liabilities
are translated at exchange rates in effect at the end of the year, and revenues and expenses are translated at weighted-
average exchange rates for the year. Transaction gains (losses) totaled approximately $0.7 million and ($1.5) million, for
the years ended December 31, 2012 and 2011, respectively, and are included in other income (expense), net in the
Company’s Consolidated Statements of Operations.
F-7
The local currency is the functional currency of our subsidiaries in Japan, Republic of Korea, Taiwan, Norway,
Sweden, and Mexico. These subsidiaries’ assets and liabilities are translated into the United States dollars at exchange
rates existing at the balance sheet dates, revenues and expenses are translated at weighted-average exchange rates, and
shareholders’ equity and intercompany balances are translated at historical exchange rates. The foreign currency
translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other
comprehensive income (loss).
Cash and Cash Equivalents
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 December 31, 2012
and 2011, credit card receivables were $1.7 million for each year and cash and cash equivalents held in bank accounts in
foreign countries totaled $10.8 million and $10.5 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.
Restricted Cash
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) Australia building lease
collateral. As of December 31, 2012 and 2011, our total restricted cash was $5.3 million and $4.6 million, respectively.
The increase in restricted cash was primarily related to the increased credit card requirements and foreign currency
fluctuations in Korea.
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 December 31, 2012 and 2011,
receivables consisted primarily of amounts due from members and associates. 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. At December 31, 2012 and 2011, the Company
held an allowance for doubtful accounts of less than $0.1 million.
Inventories
Inventories consist of raw materials, finished goods, and promotional materials that are stated at the lower of cost
or market (using standard costs that approximate average costs). The Company periodically reviews inventories for
obsolescence and any inventories identified as obsolete are reserved or written off.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization computed using the
straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the improvements. Expenditures for maintenance and repairs are charged to
expense as incurred. The cost of property and equipment sold or otherwise retired and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is included in other operating costs in the
accompanying Consolidated Statements of Operations. The estimated useful lives of fixed assets are as follows:
Office furniture and equipment
Computer hardware and software
Automobiles
Leasehold improvements(1)
___________________
(1) The Company amortizes leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term.
Estimated useful life
5 to 7 years
3 to 5 years
3 to 5 years
2 to 10 years
Property and equipment are reviewed for impairment whenever an event or change in circumstances indicates
that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes a
F-8
comparison of future projected cash flows generated by the asset or group of assets with its associated net carrying value.
If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest
charges), an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value. We
determined that no impairment indicators existed during the years ended December 31, 2012 and 2011.
Other Assets
As of December 31, 2012 and 2011, other assets were $3.2 million and $2.8 million, respectively, primarily
consisting of deposits for building leases in various locations of $1.8 million and $1.6 million, respectively. Additionally,
included in the December 31, 2012 and 2011 balances was $1.0 million and $0.9 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. Also included in
the December 31, 2012 and 2011 balances was $0.2 million of indefinite lived intangible assets relating to the Manapol®
powder trademark.
Additionally, in July 2012, the Company entered into a Services Agreement with Integrated Distribution and
Logistics Direct, LLC (doing business as SPExpress) whereby Mannatech began outsourcing its United States
warehousing and distribution functions to SPExpress. In connection with such outsourcing arrangement, the Company
sold certain assets related to distribution and warehousing and recorded a secured non-interest bearing promissory note of
$0.3 million. Of that amount, $0.2 million net of imputed interest was recorded as a long-term note receivable included in
other assets and $0.1 million representing the current portion was recorded in prepaid expenses and other current assets.
Other Long-Term Liabilities
In August 2003, the Company entered into a Long-Term Post-Employment Royalty Agreement with
Dr. Bill McAnalley, the Company’s former Chief Science Officer, pursuant to which the Company is required to pay
Dr. McAnalley, or his heirs, royalties for ten years beginning September 2005 through August 2015. Quarterly payments
related to this Long-Term Post-Employment Royalty Agreement are based on certain applicable annual global product
sales by the Company in excess of $105.4 million. At the time the Company entered into this Long-Term Post-
Employment Royalty Agreement, it was considered a post-employment benefit and the Company was required to measure
and accrue the present value of the estimated future royalty payments related to the post-employment royalty benefit and
recognize it over the life of Dr. McAnalley’s employment agreement, which was two years. As of December 31, 2012 and
2011, the Company’s liability related to this royalty agreement was $0.2 million and $1.2 million, respectively, of which
$0.1 million was currently due and included in accrued expenses. The decline in the royalty liability was associated with a
decline in estimated annual global product sales by the Company in excess of $105.4 million that reduced estimated future
royalty payments. The Company recorded a reduction to the long-term accrued royalty liability in the fourth quarter of
2012 favorably impacting other operating expenses by $0.8 million.
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. As of December 31, 2012 and 2011, accrued restoration costs
related to these leases amounted to $0.5 million and $0.4 million, respectively. At December 31, 2012 and 2011, the
Company also recorded a long-term liability for an estimated defined benefit obligation related to a non-U.S. defined
benefit plan for its Japan operations of $0.7 million and $1.3 million, respectively. The decline in the estimated defined
benefit obligation related to the recognition of a prior service benefit resulting from the amendment to its non-U.S. defined
benefit plan dated July 1, 2012.
Revenue Recognition
The Company’s revenue is derived from sales of individual products, sales of its starter and renewal packs, and
shipping fees. Substantially all of the Company’s product and pack sales are made to independent associates at published
wholesale prices and to members at discounted published retail prices. 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 packs and products upon receipt by the customer. Corporate-
sponsored event revenue is recognized when the event is held. The Company defers certain components of its revenue. At
December 31, 2012 and December 31, 2011, the Company’s deferred revenue was $1.5 million and $1.6 million,
respectively, and consisted primarily of revenue received from: (i) sales of packs and products shipped but not received by
the customers by period end; and (ii) prepaid registration fees from customers planning to attend a future corporate-
sponsored event.
F-9
We estimate a sales return reserve for expected sales refunds based on our historical experience over a rolling six-
month period. If actual results differ from our estimated sales return reserve due to various factors, the amount of revenue
recorded each period could be materially affected. Historically, our sales returns have not materially changed through the
years, as the majority of our customers who return their merchandise do so within the first 90 days after the original sale.
Sales returns have averaged 1.5% or less of our gross sales. For the year ended December 31, 2012 our sales return reserve
was composed of the following (in thousands):
Sales reserve as of January 1, 2012
Provision related to sales made in 2012
Provision related to sales made prior to 2012
Actual returns or credits in 2012 related to 2012
Actual returns or credits in 2012 related to prior periods
Sales reserve as of December 31, 2012
Shipping and Handling Costs
$
$
528
1,487
(319 )
(1,316 )
(224 )
156
The Company records freight and shipping fees collected from its customers as revenue. The Company records
inbound freight as a component of inventory and cost of sales. To improve the matching of costs associated with the
revenue from freight and shipping fees collected, freight charges associated with shipping products to our customers were
reclassified to costs of sales from selling and administrative expenses. Total revenue from freight and shipping fees were
approximately $6.2 million and $7.8 million for the years ended December 31, 2012 and 2011, respectively. Total freight
costs included in cost of sales were approximately $7.2 million and $7.9 million for the years ended December 31, 2012
and 2011, respectively.
Expenses associated with our distribution center and third party distribution facility agreements continue to be
reported in selling and administrative expenses. Total distribution expenses included in selling and administrative
expenses were approximately $2.6 million and $2.7 million for the years ended December 31, 2012 and 2011,
respectively.
Commission and Incentive Expenses
Independent associates earn commissions and incentives based on their direct and indirect commissionable net
sales over 13 business periods. Each business period equals 28 days. The Company accrues commissions and incentives
when earned by independent associates and pays commissions on product sales three weeks following the business period
end and pays commissions on its pack sales five weeks following the business period end.
In order to more closely conform to the financial presentations of our competitors, commission and incentive
expenses were reclassified to operating expenses from costs of sales. Total commission and incentive expenses reclassified
to operating expenses were approximately $73.8 million and $87.4 million for the years ended December 31, 2012 and
2011, respectively.
Advertising Expenses
The Company expenses advertising and promotions in selling and administrative expenses when incurred.
Advertising and promotional expenses were approximately $4.2 million and $4.7 million, for the years ended December
31, 2012 and 2011, respectively. Educational and promotional items, called sales aids, are sold to independent associates
to assist in their sales efforts and are included in inventories and charged to cost of sales when sold.
Research and Development Expenses
The Company expenses research and development expenses as incurred. Research and development expenses
related to new product development, enhancement of existing products, clinical studies and trials, Food and Drug
Administration compliance studies, general supplies, internal salaries, third-party contractors, and consulting fees were
approximately $1.9 million and $3.0 million for the years ended December 31, 2012 and 2011, respectively. Salaries and
contract labor are included in selling and administrative expenses and all other research and development costs are
included in other operating costs.
F-10
Stock-Based Compensation
The Company currently has one active stock-based compensation plan, which was approved by its shareholders
at its 2008 Annual Shareholder’s meeting held on June 18, 2008. The Company grants stock options to its employees,
consultants, and board members with an exercise price equal to the closing price of its common stock on the date of grant
with a term no greater than 10 years. The majority of stock options vest over two or three years. Incentive stock options
granted to shareholders who own 10% or more of the Company’s outstanding stock are granted at an exercise price that
may not be less than 110% of the closing price of the Company’s common stock on the date of grant and have a term no
greater than five years. At the date of grant, the Company determines the fair value of the stock option award and
recognizes compensation expense over the requisite service period, or the vesting period of the award. The fair value of
the stock option award is calculated using the Black-Scholes option-pricing model. The Company records stock-based
compensation expense in selling and administrative expenses
Software Development Costs
The Company capitalizes qualifying internal payroll and external contracting and consulting costs related to the
development of internal use software that are incurred during the application development stage, which includes design of
the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project
along with post-implementation stages of internal use software are expensed as incurred. The Company amortizes such
costs over the estimated useful life of the software, which is three to five years once the software is placed in service.
Other Operating Costs
Other operating costs include travel, accounting/legal/consulting fees, credit card processing fees, banking fees,
off-site storage fees, utilities, and other miscellaneous operating expenses.
Income Taxes
The Company determines the provision for income taxes using the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. The
Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation
allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future
does not meet the more likely than not criterion for recognition. The Company recognizes the effect of income tax
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being recognized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. The Company recognizes both interest
and penalties related to uncertain tax positions as part of the income tax provision.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) 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
(loss) consists of the Company’s net income (loss), foreign currency translation adjustments from its Japan, Republic of
Korea, Taiwan, Norway, and Sweden operations, and changes in the pension obligation for its Japanese employees.
Concentration Risk
A significant portion of the Company’s revenue is derived from core Ambrotose® complex products, which
include the Ambrotose® products and Advanced Ambrotose® products. For the years ended December 31, 2012 and 2011,
revenue from the core Ambrotose® products accounted for 45.2% and 41.0% of the Company’s consolidated net sales,
respectively.
F-11
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally
of cash and cash equivalents, investments, receivables, and restricted cash. The Company utilizes financial institutions that
the Company considers to be of high credit quality and periodically evaluates the credit rating of such institutions and the
allocation of their investments to minimize exposure to credit concentration risk.
Fair Value of Financial Instruments
The fair value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, time
deposits, money market investments, receivables, payables, and accrued expenses, approximate their carrying values due
to their relatively short maturities. See Note 3 (“Fair Value”) for more information.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. Under this standard, entities testing long-lived
intangible assets for impairment now have an option of performing a qualitative assessment to determine whether further
impairment testing is necessary. If an entity determines, on the basis of qualitative factors, that the fair value of the
indefinite-lived intangible asset is more-likely-than-not less than the carrying amount, the existing quantitative impairment
test is required. Otherwise, no further impairment testing is required. This ASU is effective beginning January 1, 2013,
with early adoption permitted under certain conditions. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated results of operations or financial condition.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated
Other Comprehensive Income. Under this standard, entities will be required to disclose additional information with respect
to changes in accumulated other comprehensive income (“AOCI”) balances by component and significant items
reclassified out of AOCI. Expanded disclosures for presentation of changes in AOCI involve disaggregating the total
change of each component of other comprehensive income (for example, unrealized gains or losses on available for sale
marketable securities) as well as presenting separately for each such component the portion of the change in AOCI related
to (1) amounts reclassified into income and (2) current-period other comprehensive income. Additionally, for amounts
reclassified into income, disclosure in one location would be required, based upon each specific AOCI component, of the
amounts impacting individual income statement line items. Disclosure of the income statement line item impacts will be
required only for components of AOCI reclassified into income in their entirety. Therefore, disclosure of the income
statement line items affected by AOCI components such as net periodic benefit costs would not be included. The
disclosures required with respect to income statement line item impacts would be made in either the notes to the
consolidated financial statements or parenthetically on the face of the financial statements. This ASU is effective
beginning January 1, 2013. Because this standard only impacts presentation and disclosure requirements, its adoption will
not have a material impact on the Company’s consolidated results of operations or financial condition.
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 3: 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 of the FASB ASC 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.
F-12
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 tables below present the recorded amount of financial
assets measured at fair value (in thousands) on a recurring basis as of December 31, 2012 and 2011. The Company did not
have any material financial liabilities that were required to be measured at fair value on a recurring basis at December 31,
2012 and 2011.
2012
Level 1
Level 2
Level 3
Total
Assets
Money Market Funds – Fidelity, US
Interest bearing deposits – various banks, Korea
Total assets
Amounts included in:
Cash and cash equivalents
Long-term restricted cash
Total
2011
Assets
Money Market Funds – Fidelity, US
Interest bearing deposits – various banks, Korea
Total assets
Amounts included in:
Cash and cash equivalents
Long-term restricted cash
Total
NOTE 4: INVENTORIES
$ $
$
$ $
$
$ $
$
$ $
$
1,141 $ $
2,686
3,827
$
1,141
2,686
3,827
$
$
— $ $
—
—
$
— $ $
—
—
$
— $ $
—
—
$
— $ $
—
—
$
1,141
2,686
3,827
1,141
2,686
3,827
Level 1
Level 2
Level 3
Total
4,038 $ $
2,476
6,514
$
4,124 $ $
2,390
6,514
$
— $ $
—
—
$
— $ $
—
—
$
— $ $
—
—
$
— $ $
—
—
$
4,038
2,476
6,514
4,124
2,390
6,514
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 December 31, 2012 and 2011, consisted of the
following (in thousands):
Raw materials
Finished goods
Inventory reserves for obsolescence
Total
$
$
2012
2011
6,071
10,702
(1,619 )
15,154
$
$
6,850
13,247
(2,311 )
17,786
F-13
NOTE 5: PROPERTY AND EQUIPMENT
As of December 31, 2012 and 2011, property and equipment consisted of the following (in thousands):
Office furniture and equipment
Computer hardware
Computer software
Automobiles
Leasehold improvements
Less accumulated depreciation and amortization
Property and equipment, net
Construction in process
Total
2012
9,315
10,096
46,541
133
12,380
78,465
(73,640 )
4,825
8
4,833
$
$
2011
11,560
13,029
46,738
165
12,317
83,809
(74,243 )
9,566
—
9,566
$
$
NOTE 6: CAPITAL LEASE OBLIGATIONS
As of December 31, 2012 and 2011, the net book value of leased assets was $1.0 million and $1.7 million,
respectively for leased equipment, purchased licenses, and corporate insurance. The future minimum lease payments (in
thousands) are as follows:
2013
2014
2015
2016
2017
Total future minimum lease payments
Less: Amounts representing interest (effective interest rate 9.52%)
Present value of minimum lease payments
Current portion of capital lease obligations
Long-term portion of capital lease obligations
$
$
900
548
349
137
12
1,946
(228 )
1,718
(780 )
938
NOTE 7: ACCRUED EXPENSES
As of December 31, 2012 and 2011, accrued expenses consisted of the following (in thousands):
Accrued inventory purchases
Accrued compensation
Accrued royalties
Accrued sales and other taxes
Other accrued operating expenses
Customer deposits and sales returns
Accrued travel expenses related to corporate events
Accrued shipping and handling costs
Fixed asset purchases
Rent expense
Accrued legal and accounting fees
F-14
2012
25
1,655
252
722
840
168
604
945
—
144
993
6,348
$
$
2011
$
364
1,987
391
330
1,494
537
585
561
40
253
3,972
$ 10,514
NOTE 8: INCOME TAXES
The components of the Company’s income (loss) before income taxes are attributable to the following
jurisdictions for the years ended December 31 (in thousands):
United States
Foreign
2012
2011
$
(778 )
$ (11,551 )
478
(6,327 )
$
(300 )
$ (17,878 )
The components of the Company’s income tax provision (benefit) for the years ended December 31 are as
follows (in thousands):
Current provision (benefit):
Federal
State
Foreign
Deferred provision (benefit):
Federal
State
Foreign
$
2012
(743 )
7
1,437
701
—
—
387
387
1,088
$
2011
2,002
127
1,197
3,326
(347 )
18
(216 )
(545 )
2,781
$
$
A reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax
rate is summarized as follows, for the years ended December 31:
Federal statutory income taxes
State income taxes, net of federal benefit
Difference in foreign and United States tax on foreign operations
Effect of changes in valuation allowance for net operating loss carryforwards
Effect of change in uncertain tax positions (net)
Federal Sub-Part F Income from foreign operations
Research and experimentation income tax credits
Other
2012
35.0 %
2.6
(194.0 )
(106.2 )
315.2
(170.2 )
0.0
(245.5 )
(363.1 )%
2011
35.0 %
1.1
(6.7 )
(32.1 )
(10.5 )
(2.9 )
0.0
0.5
(15.6 )%
For the years ended December 31, 2012 and 2011, the Company’s effective tax rate was (363.1)% and (15.6)%,
respectively. For 2012, the Company had a provision for income tax despite the pre-tax losses primarily because of
increases in the valuation allowance for deferred tax assets, increases in uncertain income tax positions, and differences
from foreign operations. For 2011, the Company’s effective income tax rate was lower than what would be expected if the
federal statutory income tax rate were applied to income before taxes primarily because of increases in the valuation
allowance for deferred tax assets, increases in uncertain income tax positions, and favorable differences from foreign
operations.
F-15
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of
the Company’s deferred tax assets and liabilities consisted of the following at December 31 (in thousands):
Deferred tax assets:
Current:
Deferred revenue
Inventory capitalization
Inventory reserves
Accrued expenses
Other
Total current deferred tax assets
Noncurrent:
Depreciation and amortization
Net operating loss(1)
Deferred royalty
Non-cash accounting charges related to stock options and warrants
Accrued expenses
Other
Total noncurrent deferred tax assets
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Current:
Prepaid expenses
Other
Total current deferred tax liabilities
Noncurrent:
Internally-developed software
Depreciation and amortization
Sub-Part F Income Deferred
Other
Total noncurrent deferred tax liabilities
Total deferred tax liabilities
__________________________________________
(1) The Company’s net operating loss will expire as follows (dollar amounts in thousands):
2012
2011
$
7
429
457
935
66
1,894
1,508
6,255
119
491
409
1,117
9,899
11,793
(8,519 )
$ 3,274
$
23
837
451
2,643
147
4,101
1,539
5,731
482
684
79
1,176
9,691
13,792
(9,503 )
$ 4,289
$
576
0
576
$
528
18
546
37
2
1,830
(53 )
1,816
$ 2,392
740
—
1,320
161
2,221
$ 2,767
Jurisdiction
Denmark
Mexico
Norway
Singapore
Sweden
Switzerland
Taiwan
United States (federal)
United States (states)
Gross
NOL
$
3
7,587
743
59
502
12,448
7,012
1,837
25,960
$
Tax
Effected
NOL
1
2,276
208
10
132
1,144
1,192
643
649
Expiration Years
Indefinite
2020-2021
Indefinite
Indefinite
Indefinite
2016-2018
2016-2021
2030-2031
2015-2031
F-16
At December 31, 2012 and 2011, the Company’s valuation allowance was $8.5 million and $9.5 million,
respectively. The provisions of 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 allowances presented below (in millions) at December 31, 2012 and 2011, represented a reserve
against the Company’s net deferred tax asset the Company believed the “more likely than not” criterion for recognition
purposes could not be met.
Country
Mexico
Norway
Sweden
Switzerland
Taiwan
United States
Total
2012
2011
$
$
2,276
208
132
1,043
1,192
3,668
8,519
$
$
1,889
198
122
784
1,074
5,436
9,503
At December 31, 2012 and 2011, the Company did not record a provision for any United States or foreign
withholding taxes on its undistributed earnings related to its foreign subsidiaries because it is the intention of the Company
to reinvest its undistributed earnings indefinitely in its foreign operations. Generally, such earnings become subject to
United States income tax upon the remittance of dividends and under certain other circumstances. At December 31, 2012,
it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
Deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31
as follows (in thousands):
Current deferred tax assets
Noncurrent deferred tax assets
Current deferred tax liabilities
Noncurrent deferred tax liabilities
Net deferred tax assets (liabilities)
2012
2011
$
$
561
502
(179 )
(2 )
882
$
$
936
772
(185 )
(1 )
1,522
On January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a
comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements,
uncertain tax positions that it has taken or expects to take on a tax return. Topic 740 requires that a company recognize in
its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of
December 31, 2012, the Company recorded $2.8 million in current liabilities and $0.2 million in other long-term liabilities
related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2012,
the Company had gross tax-affected unrecognized tax benefits of $3.0 million that, if recognized, would impact the
effective tax rate. The Company recognizes penalties and interest charges related to unrecognized tax benefits in current
tax expense. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years
ended December 31, 2012 and 2011 (in thousands):
Balance as of January 1
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions of tax positions of prior years
Balance as of December 31
2012
3,984
81
58
(1,084 )
3,039
$
$
2011
$ 2,114
570
1,300
—
$ 3 ,984
F-17
The Company’s 2005-2009 tax years remain subject to examination by the IRS for U.S. federal tax purposes. On
May 26, 2011 the IRS issued a Revenue Agent’s report (“RAR”) detailing proposed adjustments for the tax years under
examination. The net tax deficiency associated with the RAR is $8.5 million plus penalties of $1.5 million. On July 8,
2011, the Company filed a protest letter challenging the proposed adjustments contained in the RAR with the Appeals
Division of the IRS. On July 26, 2012, the Company participated in a hearing with the Appeals Division of the IRS, and
the Company believes the net tax deficiency should approximate amounts previously recorded as uncertain income tax
positions for the tax years 2005-2009. Therefore, the Company has made a reduction in its tax positions for tax years after
2009 of approximately $1.1 million. The Company was able to recognize deferred tax assets due to this reduction of prior
year tax positions. There are other ongoing audits in various international jurisdictions that are not material to our financial
statements.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign
jurisdictions. As of December 31, 2012, the tax years that remained subject to examination by a major tax jurisdiction for
the Company’s most significant subsidiaries were as follows:
Jurisdiction
Australia
Canada
Denmark
Japan
Mexico
Norway
Republic of Korea
Singapore
South Africa
Sweden
Switzerland
Taiwan
United Kingdom
United States
Open Years
2008-2012
2006-2012
2009-2012
2007-2012
2010-2012
2010-2012
2007-2012
2009-2012
2009-2012
2010-2012
2009-2012
2007-2012
2006-2012
2006-2012
NOTE 9: TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES
During 2012, we paid employment compensation of approximately $154,000 in salary, bonus, auto allowance,
and other compensation to Landen Fredrick, son of J. Stanley Fredrick, the Company’s Chairman of the Board and a major
shareholder. In addition, Landen Fredrick participated in the employee health care benefit plans available to all employees
of the Company. Landen Fredrick has served as Vice President, North American Sales and Operations since January of
2011. Prior to that, Mr. Fredrick served as Vice President, North American Sales since February of 2010 and as Senior
Director of Tools and Training since his hire in May of 2006.
Mr. Caster, the Company’s founder, major stockholder, and former Chairman of the Board, founded MannaRelief
in 1999 and served as its Chairman from 1999 through August 2007. MannaRelief employs William A. Mullens, Mr.
Caster’s brother-in-law, as its Executive Director. Mr. Caster’s wife, Linda Caster, serves as MannaRelief’s Chairman of
the Board. MannaRelief is a 501(c)(3) charitable organization that provides charitable services for children. MannaRelief
is not owned or operated by the Company.
Historically, the Company has made cash donations to MannaRelief, sold products to MannaRelief at cost plus
shipping and handling charges, and shipped products purchased by MannaRelief to its chosen recipients. In addition,
certain Company employees and consultants periodically volunteer to work or host various fund raising projects and
events for MannaRelief at no cost to MannaRelief.
The Company has made cash donations and sold products to MannaRelief as follows:
Sold Products
Contributed Cash Donations
Products Donated in Lieu of Cash
2012
$ 0.3 million
$ 0.5 million
$ 0.1 million
2011
$ 0.4 million
$ 0.7 million
—
F-18
On December 1, 2011, the Company entered into a new Consulting Agreement with Wonder Enterprises, LLC
(f/k/a Salinda Enterprises, LLC; hereinafter “Wonder”) for an initial term of six months with a renewal period of six months
upon thirty days written notice by the Company. Pursuant to the terms of the Consulting Agreement, the Company has paid
Wonder $600,000 for consulting services performed by Mr. Caster plus reimbursable expenses through December 31, 2012.
On March 6, 2013, , the Company entered into a new consulting agreement with Wonder, effective January 1,
2013, for an initial term of six months or until May 31, 2013 for the consulting services of Mr. Caster who is an employee
of Wonder. Pursuant to the terms of the Consulting Agreement, the Company will pay Wonder $300,000 plus reimbursable
expenses for consulting services performed by Mr. Caster. The Consulting Agreement may be renewed by the Company for
an additional six month period upon 30 days’ written notice to Wonder before the expiration of the current term.
Mr. Ray Robbins is a member of the Company’s Board of Directors and a major shareholder. Mr. Robbins holds
positions in the Company’s associate global downline network marketing system. In addition, several of Mr. Robbins’
family members are independent associates. The Company pays commissions and incentives to its independent associates
and during 2012 and 2011, the Company paid aggregate commissions and incentives to Mr. Robbins and his family of
approximately $3.0 million and $3.2 million, respectively. The aggregate amount of commission and incentives paid to
Mr. Robbins was approximately $2.6 million and $2.8 million in 2012 and 2011, respectively. The aggregate amount of
commission and incentives paid to family members was approximately $0.4 million in 2012 and 2011, respectively. The
majority of $0.4 million paid to family members in each of 2012 and 2011, respectively, was paid to his son, Kevin
Robbins in the amount of approximately $0.2 million in each year, as well as his daughter, Marla Finley, and daughter-in-
law, Demra Robbins, who both share an account that totaled approximately $0.2 million in each year. All commissions
and incentives were paid to Mr. Robbins and his family members in accordance with the Company’s global associate
career and compensation plan.
NOTE 10: EMPLOYEE BENEFIT PLANS
Employee Retirement Plan
Effective May 9, 1997, the Company adopted a Defined Contribution 401(k) and Profit Sharing Plan (the “401(k)
Plan”) for its United States and Canada employees. The 401(k) Plan covers all regular full-time and part-time employees
who have completed three months of service and attained the age of twenty-one. United States employees can contribute
up to 100 percent of their annual compensation but are limited to the maximum annual dollar amount allowable under the
Internal Revenue Code. The 401(k) plan permits matching and discretionary employer contributions. The Company’s
matching contributions for its United States and Canada employees vest ratably over a five-year period. During the years
ended December 31, 2012 and 2011, the Company contributed approximately $0.1 million for each year to the 401(k) Plan
for matching contributions.
The Company also sponsors a non-U.S. defined benefit plan covering its employees in its Japan subsidiary (the
“Benefit Plan”). Pension benefits under the Benefit Plan are based on years of service and annual salary. On July 1, 2012,
the Company amended the Benefit Plan to convert the years of service and annual salary components of the Benefit Plan
to a point system for position grade and years of service. The Company deferred a prior service cost gain of $0.7 million
and was reflected in the projected benefit obligation (“BPO”) for the year ended December 31, 2012. The Company
utilizes actuarial methods. Inherent in the application of these actuarial methods are key assumptions, including, but not
limited to, discount rates and expected long-term rates of return on plan assets. Changes in the related Benefit Plan costs
may occur in the future due to changes in the underlying assumptions, changes in the number and composition of plan
participants, and changes in the level of benefits provided. The Company uses a measurement date of December 31 to
evaluate and record any post-retirement benefits related to the Benefit Plan.
F-19
Projected Benefit Obligation and Fair Value of Plan Assets
The Benefit Plan’s projected benefit obligation and valuation of plan assets were as follows for the years ended
December 31 (in thousands):
Projected benefit obligation:
Balance, beginning of year
Service cost
Interest cost
Liability (gains) and losses
Benefits paid to participants
Special termination benefit
Prior service cost
Pension adjustment
Foreign currency
Balance, end of year
Plan assets:
Fair value, beginning of year
Company contributions
Benefits paid to participants
Fair value, end of year
2012
1,270
169
15
94
(71 )
7
(678 )
—
(92 )
714
—
71
(71 )
—
$
$
$
$
$
2011
1,008
186
18
11
(39 )
21
—
6
59
1,270
—
39
(39 )
—
$
$
$
Funded status of the Benefit Plan as of December 31 (in thousands):
2012
2011
Benefit obligation
Fair value of plan assets
Excess of benefit obligation over fair value of plan assets
$
(714 )
$ (1,270 )
—
—
$
(714 )
$ (1,270 )
Amounts recognized in the accompanying Consolidated Balance Sheets consist of,
as of December 31 (in thousands):
Accrued benefit liability
Transition obligation and unrealized gain
Net amount recognized in the consolidated balance sheets
Other changes recognized in comprehensive income/loss (in thousands):
Net periodic cost
Current year actuarial (gain) loss
Amortization of transition obligation
Amortization of actuarial gain
Total recognized in other comprehensive income
Total recognized in comprehensive income (loss)
2012
2011
$
$
(714 )
(682 )
(1,396 )
$
(1,270 )
(190 )
$
(1,460 )
Years Ended December 31,
2012
2011
$
$
158
94
(5 )
—
89
247
$
$
221
11
(5 )
15
21
242
F-20
Amounts not yet reflected in net periodic benefit cost and included in accumulated
other comprehensive gain/loss (in thousands):
Transition obligation
Prior service cost
Net actuarial gain
Total recognized in accumulated other comprehensive loss
As of December 31,
2012
$ 168
602
(88 )
$ 682
2011
$ 202
—
(12 )
$ 190
2013 estimated amounts of amortized transition obligation (in thousands):
Transition obligation
2013
$ (5 )
Aggregate Benefit Plan information and accumulated benefit obligation in excess
of plan assets (in thousands):
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
As of December 31,
2012
$ 714
714
—
2011
$ 1,270
887
—
The weighted-average assumptions to determine the benefit obligation and net cost are as follows:
Discount rate
Rate of increase in compensation levels
Components of Expense
2012
1.00 %
—
2011
1.75 %
3.0 %
Pension expense for the Benefit Plan is included in selling, general and administrative expenses in the
Consolidated Statements of Operations and is comprised of the following for the years ended December 31 (in thousands):
Service cost
Interest cost
Amortization of transition obligation
Gain
Special termination
Prior service cost
Benefit adjustment
Total pension expense
Estimated Benefits and Contributions
2012
2011
169
15
5
(9 )
7
(29 )
—
158
$
$
186
18
5
(15 )
21
—
6
221
$
$
The Company expects to contribute approximately $61,000 to the Benefit Plan in 2013. As of December 31,
2012, benefits expected to be paid by the Benefit Plan for the next ten years is approximately as follows (in thousands):
2013
2014
2015
2016
2017
Next five years
Total expected benefits to be paid
F-21
$
$
61
81
130
41
35
124
472
NOTE 11: STOCK OPTION PLAN
Summary of Stock Plan
The Company currently has one active stock-based compensation plan, which was approved by shareholders. The
Company grants stock options to employees, consultants, and board members at the fair value of its common stock on the
date of grant, with a term no greater than ten years. The majority of stock options vest over two or three years.
Shareholders who own 10% or more of the Company’s outstanding stock are granted incentive stock options at an exercise
price that may not be less than 110% of the fair market value of the Company’s common stock on the date of grant and
have a term no greater than five years.
In February 2008, the Company’s Board of Directors approved the Mannatech, Incorporated 2008 Stock
Incentive Plan (the “2008 Plan”), which reserves up to 1,000,000 shares of common stock for issuance of stock options
and restricted stock to our employees, board members, and consultants, plus any shares reserved under the Company’s
then-existing, unexpired stock plans for which options had not yet been issued, and any shares underlying outstanding
options under the then-existing stock option plans that terminate without having been exercised in full. The 2008 Plan was
approved by the Company’s shareholders at the 2008 Annual Shareholders’ Meeting. The 2008 Plan was approved by the
Company’s shareholders at the 2008 Annual Shareholders’ Meeting and was amended at the 2012 Annual Shareholders’
Meeting held May 30, 2012 to increase the number of shares of common stock subject to the plan by 100,000. As of
December 31, 2012, the 2008 Plan had 148,434 stock options available for grant before the plan expires on February 20,
2018.
A summary of changes in stock options outstanding during the year ended December 31, 2012, is as follows:
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable at year end
2012
Number of
Options
(in thousands)
139
20
—
(36 )
123
Weighted
average
exercise
price
$ 23.24
5.00
$
$
—
$ 24.94
$ 19.76
90
$ 22.55
Weighted
average
remaining
contractual
life
(in years)
Aggregate
intrinsic
value (in
thousands)
7.4
6.9
—
—
The Company issues new shares upon the exercise of options. No options were exercised during the year ended
December 31, 2012.
Valuation and Expense Information Under FASB ASC Topic 718 Compensation – Stock Compensation
Under the provisions of FASB ASC Topic 718, the Company is required to measure and recognize compensation
expense related to any outstanding and unvested stock options previously granted, and thereafter recognize, in its
consolidated financial statements, compensation expense related to any new stock options granted after implementation
using a calculated fair-value based option-pricing model.
The Company uses the Black-Scholes option-pricing model to calculate the fair value of all of its stock options
and its assumptions are based on historical information. The following assumptions were used to calculate the
compensation expense and the calculated fair value of stock options granted each year:
Dividend yield:
Risk-free interest rate:
Expected market price volatility:
Average expected life of stock options:
_________________________
(1) The Company declared no dividends in 2012 or 2011.
F-22
—
2012
(1)
0.62 — 0.75 %
78.4 — 81.6 %
4.5 years
2011
(1)
—
0.78 — 1.82 %
71.1 — 72.8 %
4.5 years
The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is
based on historical volatilities of the Company’s stock. The expected life assumptions are based on the Company’s
historical employee exercise and forfeiture behavior.
The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2012
and 2011 was $3.06 and $6.39 per share, respectively. The total fair value of shares vested during the years ended
December 31, 2012 and 2011 was $0.1 million and $0.4 million, respectively.
The Company recorded the following amounts related to the expense of the fair values of options during the years
ended December 31, 2012 and 2011 (in thousands):
Selling, general and administrative expenses and income (loss) from operations before
income taxes
Benefit for income taxes
Effect on net loss
2012
2011
$
209 $ 356
44
80
$
165 $ 276
As of December 31, 2012, the Company had approximately $0.1 million of total unrecognized compensation
expense related to stock options currently outstanding, to be recognized in future years, ending December 31,
as follows (in thousands):
2012
2013
Total gross unrecognized
compensation expense
Total tax benefit associated
with unrecognized
compensation expense
Total net
unrecognized
compensation expense
$
$
81
16
97
$
$
15
3
18
$
$
66
13
79
NOTE 12: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office space, automobiles, computer hardware, and warehouse equipment under
various non-cancelable operating leases. Some of these leases have renewal options. All of the Company’s leases expire at
various times through August 2023. The Company also leases equipment under various month-to-month cancelable
operating leases. For the years ended December 31, 2012 and 2011, total rent expense was approximately $3.9 million and
$4.3 million, respectively.
Approximate future minimum rental commitments for non-cancelable operating leases (in thousands) are as
follows:
Years ending December 31,
2013
2014
2015
2016
2017
Thereafter
$ 2,253
1,141
1,035
839
781
176
$ 6,225
F-23
Purchase Commitments
The Company maintains supply agreements with its suppliers and manufacturers. Some of the supply agreements
contain exclusivity clauses and/or minimum annual purchase requirements. Purchase agreements with suppliers that
contain minimum purchase clauses are as follows:
In March 2006, the Company entered into a ten-year supply agreement to purchase plant-derived mineral
nutrition products from IHT Health Products, Inc. (f.k.a. InB:Biotechnologies, Inc.). As of December 31,
2012, the Company is required to purchase an aggregate of $6.7 million through 2016.
In June of 2008, the Company entered into a three-year supply agreement with Improve U.S.A. to purchase
an aloe vera powder. In August 2011, the Company entered into an amendment to its supply agreement to
extend the term of the agreement for a period of three years commencing June 1, 2011 and expiring on May
14, 2014. As of December 31, 2012, the Company is required to purchase $1.0 million by the end of the
agreement in 2014.
Royalty and Consulting Agreements
The Company utilizes royalty agreements with individuals and entities to provide compensation for items relating
to developed products, websites and email provided to our associates. The Company paid royalties for such royalty
agreements of $0.3 million and $0.2 million in 2012 and 2011, respectively. Royalty costs were reclassified to costs of
sales from selling and administrative expenses.
Employment Agreements
The Company has non-cancellable employment agreements with certain executives. If the employment
relationships with these executives were terminated, as of December 31, 2012, the Company would continue to be
indebted to the executives for $1.3 million, payable through 2013.
NOTE 13: LITIGATION
Business Arbitration and Litigation
Marinova Pty. Limited v. Mannatech, Incorporated & Mannatech (International) Limited, Case No. 50-122-T-
00635-09, International Centre for Dispute Resolution, a division of the American Arbitration Association
On December 10, 2009, Marinova Pty. Limited (“Marinova”) filed a Notice of Arbitration and Statement of
Claim with the International Centre for Dispute Resolution, which is a division of the American Arbitration Association,
against the Company and its subsidiary, Mannatech (International) Limited. Marinova’s claims stem from the parties’
April 27, 2007 purchase agreement. Through the purchase agreement, Marinova agreed to sell and the Company agreed to
buy set quantities of glyconutrient powder that the Company uses to manufacture some of its products. Marinova claimed
that the Company breached the purchase agreement by not buying the specified quantities of Marinova’s product and by
prematurely terminating the agreement. Marinova further claimed, based on the Company’s alleged breach of contract,
that Marinova suffered lost profits damages in the amount of $6,500,000, as well as attorneys’ fees and costs. The
Company subsequently filed an answer and counterclaim, seeking damages in the amount of $618,750, representing the
price paid for alleged non-conforming product.
On March 16, 2012, Mannatech and Marinova entered into a binding settlement agreement that fully disposes of
the claims and controversies between them. Pursuant to that settlement agreement, Mannatech forgave the $618,750
payment owing and made a one-time payment of $2,600,000 to Marinova, which has been recorded in the December 31,
2011 financial statements. The settlement also includes a full release of both parties and a covenant not to sue.
Product Liability Litigation
Susan Chon vs. Mannatech, Inc. dba Mannatech Dietary Supplements; Eun-Sook Cho; Gina Park; Good News
Acupunture/Couples Acupuncture, Case No. BC460029, Los Angeles County Superior Court
On April 21, 2011, Susan Chon, an individual, filed suit against the Company in Los Angeles County Superior
Court. The plaintiff is one of the Company’s former associates and has alleged sustaining injuries and enduring
F-24
complications from breast cancer as the result of taking Ambrotose®, one of the Company’s products. The plaintiff also
alleges that co-defendants En-Sook Cho, Gina Park and Good News Acupuncture represented to her that the Ambrotose®
product cured serious medical problems. Unspecified damages are sought against all defendants.
On March 1, 2012, the parties engaged in a private mediation session, and a settlement was reached resolving all
outstanding issues between the parties in the amount of $200,000, $79,000 of which is covered by the Company’s insurer.
On March 19, 2012, the parties executed and filed a motion to dismiss the litigation with the court. The Company now
considers this matter closed.
Administrative Proceedings
Our 2005-2009 tax years remain subject to examination by the IRS for U.S. federal tax purposes. On May 26,
2011 the IRS issued a Revenue Agent’s report (“RAR”) detailing proposed adjustments for the tax years under
examination. The net tax deficiency associated with the RAR is $8.5 million plus penalties of $1.5 million. On July 8,
2011, we filed a protest letter challenging the proposed adjustments contained in the RAR and are pursuing resolution of
these items with the Appeals Division of the IRS. On July 26, 2012, the Company participated in a hearing with the
Appeals Division of the IRS, and the Company believes the net tax deficiency should approximate amounts previously
recorded as uncertain income tax positions for the tax years 2005-2009. Therefore, the Company has made a reduction in
its tax positions for tax years after 2009 of approximately $1.1 million. The Company was able to recognize deferred tax
assets due to this reduction of prior year tax positions. There are other ongoing audits in various international jurisdictions
that are not material to our financial statements.
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 its 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 or as they become determinable.
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. While it is not possible to predict what liability or damages the Company might incur in connection with any
litigation, based on the advice of counsel and management review of the existing facts and circumstances related to certain
legal proceedings, and related legal fees, the Company has accrued $0.2 million as of December 31, 2012 for these
matters, which is included in accrued expenses in its Consolidated Balance Sheet.
NOTE 14: SHAREHOLDERS’ EQUITY
Equity Line
On September 16, 2010, the Company entered into an Investment Agreement (as amended, the “Investment
Agreement”) with Dutchess Opportunity Fund, II, LP, a Delaware limited partnership (“Dutchess”), whereby the
Company may sell up to $10 million of the Company’s common stock to Dutchess over a period of 36 months from the
first trading day following the effectiveness of the registration statement registering the resale of shares pursuant to the
Investment Agreement (the “Equity Line”).
The Company may draw on the Equity Line from time to time, as and when it determines appropriate in
accordance with the terms and conditions of the Investment Agreement. The Company is not permitted to draw on the
Equity Line unless there is an effective registration statement to cover the resale of the shares. The Company filed a
registration statement with the SEC, and on October 28, 2010, the SEC declared effective the Company’s Registration
Statement on Form S-3 (File No. 333-169774), which registered up to 5,000,000 shares of common stock that may be
resold by Dutchess pursuant to the Investment Agreement. The number of shares registered on Form S-3 are subject to
adjustment for the reverse stock split pursuant to Rule 416 of the Securities Act.
F-25
Investors should read the Investment Agreement together with the other information concerning the Company
that the Company publicly files in reports and statements with the SEC.
As of March 27, 2013, no shares of common stock have been issued pursuant to the Investment Agreement.
Preferred Stock
On May 19, 1998, the Company amended its Amended and Restated Articles of Incorporation to reduce the
number of authorized shares of common stock from 100.0 million to 99.0 million and the Company authorized 1.0 million
shares of preferred stock with a par value of $0.01 per share. No shares of preferred stock have ever been issued or
outstanding.
Treasury Stock
On June 30, 2004, the Company’s Board of Directors authorized the Company to repurchase, in the open market,
the lesser of (i) 131,756 shares of its common stock and (ii) $1.3 million of its shares, (the “June 2004 Plan”). On August
28, 2006, a second program permitting the Company to purchase, in the open market, up to $20 million of its outstanding
shares was approved by our Board of Directors (the “August 2006 Plan”).
On July 14, 2011, the Company’s Board of Directors authorized the Company to reactivate the June 2004 Plan.
During July 2011, the Company repurchased 528 shares of its common stock in the open market under the June 2004 Plan.
The total cost and average price per share were approximately $5,000 and $9.43, respectively. As of March 22, 2013, the
maximum number of shares available for repurchase under the June 2004 Plan was 19,084, and the total number of shares
purchased in the open market under the June 2004 Plan was 112,672. No shares have ever been purchased under the
August 2006 Plan. The Company does not have any stock repurchase plans or programs other than the June 2004 Plan
and the August 2006 Plan.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net, which is displayed in the Consolidated Statement of
Shareholders’ Equity and Comprehensive Income (loss), represents net income (loss) plus the results of certain
shareholders’ equity changes not reflected in the consolidated statements of operations. Such items include foreign
currency translation and certain pension and postretirement benefit obligations.
The after-tax components of accumulated other comprehensive income (loss), are as follows (in thousands):
Balance as of December 31, 2011
Current-period change
Balance as of December 31, 2012
Foreign
Currency
Translation
Pension
Postretirement
Benefit
Obligation
Accumulated
Other
Comprehensive
Income (Loss), Net
$
$
(539 )
(565 )
(1,104 ) $
112
315
427 $
(427 )
(250 )
(677 )
NOTE 15: EARNINGS (LOSS) PER SHARE
The Company calculates basic Earnings Per Share (EPS) by dividing net income (loss) by the weighted-average
number of common shares outstanding for the period. The diluted EPS also reflects the potential dilution that could occur
if common stock were issued for awards under the 2008 Stock Incentive Plan. The Company reported net losses for the
years ended December 31, 2012 and 2011 and approximately 0.1 million of the Company’s stock options were excluded
from the diluted EPS calculation for each year, respectively, as the effect would have been antidilutive. In determining
potential dilution effect of outstanding stock options during 2012 and 2011, the Company used average common stock
close price of $5.32 and $10.89, per share, respectively.
NOTE 16: SEGMENT INFORMATION
The Company conducts its business as a single operating segment, consolidating all of its business units into a
single reportable entity, as a seller of proprietary nutritional supplements, topical and skin care products, and weight-
F-26
management products through its network marketing distribution channels operating in seventeen countries. Each of the
Company’s business units sells similar packs and products and possesses similar economic characteristics, such as selling
prices and gross margins. In each country, the Company markets its products and pays commissions and incentives in
similar market environments. The Company’s management reviews its financial information by country and focuses its
internal reporting and analysis of revenues by packs and product sales. The Company sells its products through its
independent associates and distributes its products through similar distribution channels in each country. No single
independent associate has ever accounted for more than 10% of the Company’s consolidated net sales.
The Company operates facilities in ten countries and sells product in twenty-four countries around the world.
These facilities are located in the United States, Canada, Switzerland, Australia, the United Kingdom, Japan, the Republic
of Korea (South Korea), Taiwan, South Africa and Mexico. Each facility services different geographic areas. We currently
sell our products in three regions: (i) North America (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, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea,
Singapore and Taiwan). In November 2012, the Company commenced the shipment of its products to the Ukraine and in
December 2012, the Company commenced the shipment of its products to Hong Kong. The Switzerland office was created
to manage certain day-to-day business needs of non-North American markets.
Consolidated net sales shipped to customers in these regions, along with pack and product information for the
years ended December 31, are as follows (in millions, except percentages):
Region
North America
Asia/Pacific
EMEA
Total
2012
2011
$
$
86.5
70.6
16.3
173.4
49.9 %
40.7 %
9.4 %
100.0 %
$
$
101.9
81.4
17.4
200.7
50.8 %
40.6 %
8.6 %
100.0 %
Consolidated product sales
Consolidated pack sales
Consolidated other, including freight
Total
2012
2011
$
$
155.8
11.4
6.2
173.4
$
$
171.5
21.3
7.9
200.7
Long-lived assets by region, which include property and equipment and construction in progress for the Company
and its subsidiaries, as of December 31, reside in the following countries, as follows (in millions):
Region
North America
Asia/Pacific
EMEA
Total
2012
2011
$
$
3.8
0.7
0.3
4.8
$
$
8.2
1.1
0.3
9.6
Inventory balances by region, which consist of raw materials, and finished goods, including promotional
materials, and offset by obsolete inventories, for the Company and its subsidiaries, reside in the following countries as of
December 31, as follows (in millions):
Region
North America
Asia/Pacific
EMEA
Total
2012
2011
$
$
9.5
4.2
1.5
15.2
$
$
12.2
3.8
1.8
17.8
F-27
NOTE 17: SUBSEQUENT EVENTS
On February 14, 2013, B. Keith Clark, Chief Operating Officer and Chief Legal Officer departed from the
Company. Mr. Clark’s employment termination date was March 18, 2013 and under the terms of his employment
agreement, as amended, he will receive a bi-weekly payment of $12,884.62 through May 17, 2014. Additionally, Mr.
Clark will have continued use of an automobile jointly leased and paid monthly by the Company for $992.64 through the
lease expiration date of May 17, 2014.
On March 4, 2013, the Company entered into an employment agreement with Roy Truett to serve as its President
of International and Chief Operating Officer. The employment agreement provides for Mr. Truett’s employment for a term
of one year and will renew for successive one-year terms if not previously terminated or if neither party gives the other at
least thirty days’ prior written notice of its intent not to renew. Furthermore, the employment agreement provides for an
annual base salary of $340,000 and for (i) up to $30,000 for moving expenses; (ii) up to $30,000 for closing costs related
to the purchase of a residence; (iii) commuting costs and temporary housing costs for a period of up to six months; (iv) a
signing bonus of $50,000; (v) eligibility to earn up to $52,000 pursuant to the 2013 executive bonus plan; (vi) a monthly
car allowance of $1,000; (vii) twenty days of paid vacation annually; and (viii) all employee benefits offered to
Mannatech’s employees. In conjunction with the employment agreement, the Company granted stock options to purchase
10,000 shares of its common stock with an exercise price of $5.69 per share. The grant date of the options is March 4,
2013 with a fair value of $3.53 per share that vest equally over three years.
On March 6, 2013, the Company entered into a new consulting agreement with Wonder Enterprises, LLC
(hereinafter “Wonder”), effective January 1, 2013, for an initial term of six months or until May 31, 2013 for the
consulting services of Mr. Caster who is an employee of Wonder and the Company’s founder and a major stockholder.
Pursuant to the terms of the Consulting Agreement, the Company will pay Wonder $300,000 plus reimbursable expenses
for consulting services performed by Mr. Caster. The Consulting Agreement may be renewed by the Company for an
additional six month period upon 30 days’ written notice to Wonder before the expiration of the current term.
F-28
INDEX TO EXHIBITS
Incorporated by Reference
Exhibit
Number
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Exhibit Description
Amended and Restated Articles of Incorporation of Mannatech, dated
May 19, 1998.
Amendment to the Amended and Restated
Articles of Incorporation of Mannatech, dated January 13, 2012.
Fourth Amended and Restated Bylaws of Mannatech, dated August 8,
Form
File No.
Exhibit (s)
Filing Date
S-1
333-63133
3.1
October 28, 1998
8-K
000-24657
3.1
January 17, 2012
2001 (Corrected).
10-K
000-24657
3.2
March 16, 2007
First Amendment to the Fourth Amended and Restated Bylaws of
Mannatech, effective November 30, 2007.
8-K
000-24657
3.1
December 6, 2007
Specimen Certificate representing Mannatech’s common stock, par
value $0.0001 per share.
S-1
333-63133
4.1
October 28, 1998
Amended and Restated 1997 Stock Option Plan, dated August 7,
2004.
2008 Stock Incentive Plan.
First Amendment to the Mannatech 2008 Stock Incentive Plan.
Mannatech, Incorporated 2008 Stock Incentive Plan, as amended.
Investment Agreement by and between Mannatech and Dutchess
10-K
DEF 14A
8-K
8-K
000-24657
10.1 March 15, 2004
000-24657 Appendix B April 29, 2008
June 11, 2010
99.1
000-24657
June 1, 2012
10.1
000-24657
Opportunity Fund, II, LP dated September 16, 2010.
8-K
000-24657
10.1
September 21, 2010
Amendment to Investment Agreement, dated as of October 4, 2010,
by and between Mannatech and Dutchess Opportunity Fund, II, LP.
8-K
000-24657
10.1
October 5, 2010
Amended and Restated 1998 Incentive Stock Option Plan, dated
August 7, 2004.
10-K
000-24657
10.1 March 15, 2004
Registration Rights Agreement by and between Mannatech and
Dutchess Opportunity Fund, II, LP dated September 16, 2010.
Amended and Restated 2000 Option Plan, dated August 7, 2004.
Form of Indemnification Agreement between Mannatech and each
member of the Board of Directors of Mannatech Korea Ltd., dated
March 3, 2004.
Form of Indemnification Agreement between Mannatech and each of
the following directors: J. Stanley Fredrick, Patricia Wier, Alan D.
Kennedy, Gerald E. Gilbert, Marlin Ray Robbins, Larry A. Jobe,
and Robert A. Toth.
Commercial Lease Agreement between Mannatech and MEPC
Quorum Properties II Inc., dated November 7, 1996, as amended by
the First Amendment thereto dated May 29, 1997 and the Second
Amendment thereto dated November 13, 1997.
Second Amendment to the Commercial Lease Agreement between
Mannatech and Texas Dugan Limited Partnership, dated September
22, 2005.
Commercial Lease Agreement between Mannatech and MEPC
Quorum Properties II Inc., dated May 29, 1997 as amended by the
First Amendment thereto dated November 6, 1997.
Third Amendment to the Commercial Lease Agreement between
Mannatech and Texas Dugan Limited Partnership, dated September
22, 2005.
Trademark License and Supply Agreement between Mannatech and
Carrington Laboratories, Inc., dated January 25, 2007. (Portions
of this exhibit were omitted pursuant to a confidential treatment
request submitted pursuant to Rule 24b-2 of the Exchange Act.)
Supply Agreement between Mannatech and Natural Aloe de Costa
Rica, S.A. dated April 1, 2012 (Portions of this exhibit were omitted
pursuant to a confidential treatment request submitted pursuant to
Rule 24b-2 of the Exchange Act.)
Supply Agreement between Mannatech (International) Limited and
Marinova Pty. Limited, effective August 9, 2007 and dated May 7,
2007. (Portions of this exhibit were omitted pursuant to a
confidential treatment request submitted pursuant to Rule 24b-2 of
the Exchange Act.)
8-K
10-K
000-24657
000-24657
10.2
10.1 March 15, 2004
September 21, 2010
10-Q
000-24657
10.2
August 9, 2004
10-Q
000-24657
10.4
November 4, 2010
S-1
333-63133
10.13
September 10, 1998
10-Q
000-24657
10.1
November 9, 2005
S-1
333-63133
10.14
September 10, 1998
10-Q
000-24657
10.2
November 9, 2005
8-K
000-24657
10.1
January 31, 2007
8-K
000-24657
10.1 May 3, 2011
10-Q
000-24657
10.3 May 10, 2007
Exhibit
Number
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
Exhibit Description
Amendment to Purchase Agreement between
Mannatech and Marinova PTY, Limited, dated
May 6, 2008. (Portions of this exhibit were omitted
pursuant to a confidential treatment request submitted
pursuant to Rule 24b-2 of the Exchange Act.)
Purchase Agreement between Mannatech and Larex, Inc., dated
January 1, 2006. (Portions of this exhibit were omitted pursuant to
a confidential treatment request submitted pursuant to Rule 24b-2
of the Exchange Act.)
Purchase Agreement between Mannatech and Wellness Enterprises,
LLC, dated February 1, 2006. (Portions of this exhibit were
omitted pursuant to a confidential treatment request submitted
pursuant to Rule 24b-2 of the Exchange Act.)
Supply Agreement between Mannatech and Coradji PTY. Limited,
dated March 29, 2004. (Portions of this exhibit were omitted
pursuant to a confidential treatment request submitted pursuant to
Rule 24b-2 of the Exchange Act.)
Supply License Agreement between Mannatech and
InB:Biotechnologies, Inc., dated March 22, 2006. (Portions of this
exhibit were omitted pursuant to a confidential treatment request
submitted pursuant to Rule 24b-2 of the Exchange Act.)
Initial Commercial Supply and Manufacturing Agreement between
Mannatech and Fine Chemetics, Inc., dated March 29, 2006.
(Portions of this exhibit were omitted pursuant to a confidential
treatment request submitted pursuant to Rule 24b-2 of the
Exchange Act.)
Supply Agreement between Mannatech, Incorporated, and Improve
U.S.A., Inc., effective June 1, 2008, and executed May 2, 2008.
(Portions of this exhibit were omitted pursuant to a confidential
treatment request submitted pursuant to Rule 24b-2 of the
Exchange Act.)
Amendment to Supply Agreement between Mannatech and Improve
U.S.A., dated June 1, 2011. (Portions of this exhibit were omitted
pursuant to a confidential treatment request submitted pursuant to
Rule 24b-2 of the Exchange Act.)
Services Agreement by and between Integrated Distribution and
Logistics Direct, LLC and Mannatech dated July 2, 2012
(Portions of this exhibit were omitted pursuant to a confidential
treatment request submitted pursuant to Rule 24b-2 of the
Exchange Act.)
Sublease by and between Integrated Distribution and Logistics
Direct, LLC and Mannatech, dated July 2, 2012. (Portions of this
exhibit were omitted pursuant to a confidential treatment request
submitted pursuant to Rule 24b-2 of the Exchange Act.)
Amended and Restated Employment Agreement between Terry L.
Persinger and Mannatech, dated June 16, 2008.
Employment Agreement between Robert A. Sinnott, Ph.D. and
Mannatech, dated October 5, 2007.
Employment Agreement between Mannatech and Mr. Samuel L.
Incorporated by Reference
Form
File No.
Exhibit (s)
Filing Date
10-Q
000-24657
10.4
August 11, 2008
10-K
000-24657
10.18 March 16, 2006
10-K
000-24657
10.19 March 16, 2006
10-Q/A
000-24657
10.1 March 29, 2005
10-Q
000-24657
10.2 May 10, 2006
10-Q
000-24657
10.3 May 10, 2006
8-K
000-24657
10.1 May 8, 2008
8-K
000-24657
10.1
August 22, 2011
8-K
000-24657
10.1
July 9, 2012
8-K
8-K
000-24657
10.1
June 20, 2008
000-24657
10.3
October 11, 2007
Caster, dated January 23, 2006.
10-K
000-24657
10.32 March 16, 2006
Employment Agreement between Stephen D. Fenstermacher and
Mannatech, dated October 5, 2007.
8-K
000-24657
10.2
October 11, 2007
First Amendment to Employment Agreement between
Stephen D. Fenstermacher and Mannatech, dated December 18,
2008.
Mutual Severance and Release Agreement by and between Stephen
D. Fenstermacher and Mannatech, dated March 12, 2012
Employment Agreement between Terence L. O’Day and
10-K
000-24657
10.24 March 12, 2009
10-Q
000-24657
10.1 May 10, 2012
Mannatech, dated October 5, 2007.
8-K
000-24657
10.1
October 11, 2007
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit (s)
Filing Date
Incorporated by Reference
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
14.1
21*
23.1*
23.2*
24*
31.1*
31.2*
32.1*
Employment Agreement between B. Keith Clark and Mannatech,
dated October 5, 2007.
Employment Agreement between Wayne L. Badovinus and
Mannatech, dated June 4, 2008.
Employment Agreement between Terri F. Maxwell
and Mannatech, dated August 28, 2008.
Lock-up Agreement between Mannatech and J. Stanley Fredrick,
8-K
8-K
8-K
000-24657
10.4
October 11, 2007
000-24657
10.1
June 9, 2008
000-24657
10.1
September 2, 2008
dated November 6, 2003.
10-K
000-24657
10.36 March 15, 2004
Termination of Lock-up Agreement between Mannatech and
J. Stanley Fredrick, dated March 6, 2009.
Follow-Up Agreement to Letter of Intent Agreement between
Mannatech and Jett, dated September 10, 2001.
Letter of Understanding between Mannatech and Dr. John Axford,
dated April 19, 2006.
Extension of the Letter of Spokesperson Arrangement between
Mannatech and Dr. John Axford, dated February 18, 2007.
Employment Agreement between Alfredo Bala and Mannatech,
effective October 1, 2007, dated September 18, 2007.
Amendment to Employment Agreement between Alfredo Bala and
Mannatech, dated October 11, 2007.
Clinical Research Agreement dated January 3, 2007 by and between
St. George’s Hospital Medical School (trading as St George’s,
University of London), and Mannatech, Inc.
Employment Agreement, effective March 2, 2009, by and between
Mannatech and Randy S. Bancino.
First Amendment to Employment Agreement, dated as of December
16, 2009, by and between Mannatech and Randy S. Bancino.
Consulting Agreement, dated March 17, 2009, between Mannatech
and Salinda Enterprises, LLC and Samuel L. Caster.
Consulting Agreement, dated December 1, 2011, by and between
Mannatech and Wonder Enterprises, LLC (f/k/a Salinda
Enterprises, LLC) and Samuel L. Caster.
Consulting Agreement, effective January 1, 2013, by and between
Mannatech and Wonder Enterprises, LLC and Samuel L. Caster,
dated March 6, 2013.
Separation and Release Agreement, dated July 17, 2009 between
8-K
000-24657
10.1 March 10, 2009
10-Q
000-24657
10.4
November 14, 2001
8-K
8-K
8-K
8-K
000-24657
99.1
April 21, 2006
000-24657
000-24657
99.1
February 21, 2007
10.1
September 24, 2007
000-24657
10.1
October 17, 2007
10-K
000-24657
10.39 March 17,2008
8-K
8-K
8-K
000-24657
10.1 March 6, 2009
000-24657
10.4
December 18, 2009
000-24657
10.1 March 19, 2009
10-K
000-24657
10.46 March 29, 2012
*
*
*
*
Mannatech and Terri F. Maxwell.
8-K
000-24657
10.1
July 21, 2009
Second Amendment to Employment Agreement, dated as of
December 16, 2009, by and between Mannatech and Stephen D.
Fenstermacher.
Second Amendment to Employment Agreement, dated as of
December 16, 2009, by and between Mannatech and Robert A.
Sinnott, Ph.D.
Second Amendment to Employment Agreement, dated as of
December 16, 2009, by and between Mannatech and B. Keith
Clark.
Employment Agreement, dated March 4, 2013, by and between
Mannatech and Roy Truett.
Code of Ethics.
List of Subsidiaries.
Consent of BDO USA, LLP.
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule.
Power of Attorney, which is included on the signature page of this
annual report on Form 10-K.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of the Chief Executive Officer of Mannatech.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, of the Chief Financial Officer of Mannatech.
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, of the Chief Executive Officer of Mannatech.
8-K
000-24657
10.1
December 18, 2009
8-K
000-24657
10.2
December 18, 2009
8-K
000-24657
10.3
December 18, 2009
8-K
10-K
000-24657
000-24657
10.1 March 6, 2013
14.1 March 16, 2007
Incorporated by Reference
Exhibit
Number
Exhibit Description
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
Form
File No.
Exhibit (s)
Filing Date
32.2*
2002, of the Chief Financial Officer of Mannatech.
Financial Statement Schedule Regarding Valuation and Qualifying
Accounts.
99.1*
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
_____________
* Filed herewith.
** Furnished herewith. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes
of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under that section, and shall not be incorporated by reference into
any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in
such filing.
List of Subsidiaries
Exhibit 21
The Company has twenty-six wholly-owned subsidiaries located throughout the world, as follows:
1. Mannatech Australia Pty Limited
2. Mannatech Japan, G.K.
3. Mannatech Korea, Ltd.
4. Mannatech Limited (a New Zealand Company)
5. Mannatech Limited (a UK Company)
6. Mannatech Taiwan Corporation
7. Mannatech Payment Services Incorporated
8. Mannatech Products Company Inc.
9. Internet Health Group, Inc.
10. Mannatech (International) Limited
11. Mannatech, Incorporated Malaysia Sdn. Bhd.
12. Mannatech Singapore Pte. Ltd.
13. Mannatech Canada Corporation
14. Mannatech South Africa (Pty) Ltd
15. Mannatech Bermuda Holdings Limited
16. Mannatech Denmark ApS
17. Mannatech (Gibraltar) Holdings Limited
18. Mannatech Swiss Holdings GmbH
19. Mannatech Swiss International GmbH
20. Mannatech Malaysia Trading Co. Sdn. Bhd.
21. Mannatech Norge A/S
22. Mannatech Sverige AB
23. MTEX Mexico SRL CV
24.MTEX Mexico Services SRL CV
25.Mannatech Cyprus Limited
26.Mannatech Ukraine LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors and Shareholders
Mannatech, Incorporated
We hereby consent to the incorporation by reference in the registration statements on Forms S-8 (File Nos. 333-
72767, 333-77227, 333-94519, 333-47752, 333-113975, 333-153199 and 333-169774) of Mannatech, Incorporated and
Subsidiaries (the Company) of our reports dated March 27, 2013, relating to the consolidated financial statements and
financial statement schedule, which appear in this Form 10-K.
/s/ BDO USA, LLP
Dallas, Texas
March 27, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
Exhibit 23.2
Board of Directors and Shareholders
Mannatech, Incorporated
Coppell, Texas
The audits referred to in our report dated March 27, 2013 relating to the consolidated financial statements of
Mannatech, Incorporated and Subsidiaries (the “Company”), which is contained in Item 15(a)(1) of this Form 10-K also
included the audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ BDO USA, LLP
Dallas, Texas
March 27, 2013
Exhibit 31.1
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert A. Sinnott, certify that:
1. I have reviewed this annual report on Form 10-K of Mannatech, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 27, 2013
/s/ Robert A. Sinnott
Robert A. Sinnott
Chief Executive Officer and
Chief Science Officer
Exhibit 31.2
CERTIFICATION
PURSUANT TO 17 CFR 240.13a-14
PROMULGATED UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, S. Mark Nicholls, certify that:
1. I have reviewed this annual report on Form 10-K of Mannatech, Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: March 27, 2013
/s/ S. Mark Nicholls
S. Mark Nicholls
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Mannatech, Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Robert A. Sinnott, Chief Executive Officer and Chief Science Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 27, 2013
/s/ Robert A. Sinnott
Robert A. Sinnott
Chief Executive Officer and
Chief Science Officer
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED
TO MANNATECH, INCORPORATED AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION
OR ITS STAFF UPON REQUEST.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Mannatech, Incorporated (the “Company”) on Form 10-K for the period
ending December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, S.
Mark Nicholls, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 27, 2013
/s/ S. Mark Nicholls
S. Mark Nicholls
Chief Financial Officer
A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED
TO MANNATECH, INCORPORATED AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION
OR ITS STAFF UPON REQUEST.
MANNATECH, INCORPORATED AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Exhibit 99.1
Additions
Balance at
Beginning of
Year
Charged to
Costs and
Expenses
Charged to
other
Accounts
Deductions
Balance at
End of Year
Year Ended December 31, 2011
Deducted from asset accounts:
Allowance for doubtful accounts
$
$
Allowance for obsolete inventories
Valuation allowance for deferred tax assets $
21
1,561
4,059
61
3,660
5,474
Included in accrued expenses:
Reserve for sales returns
Year Ended December 31, 2012
Deducted from asset accounts:
$
389
1,581
$
Allowance for doubtful accounts
$
Allowance for obsolete inventories
Valuation allowance for deferred tax assets $
22
2,311
9,503
8
1,766
795
—
—
—
—
—
—
(60 ) $
(2,910 ) $
(30 ) $
22
2,311
9,503
(1,442 ) $
528
(10 ) $
(2,458 ) $
(1,779 ) $
20
1,619
8,519
Included in accrued expenses:
Reserve for sales returns
$
528
1,168
(1,540 ) $
156
Board of Directors
J. Stanley Fredrick
Chairman of the Board
Owner, Fredrick Consulting Services
Marlin Ray Robbins
Independent Associate
Mannatech, Incorporated
Independent Board
of Directors
Gerald E. Gilbert
Retired Partner of Hogan and Hartson,
now known as Hogan Lovells, LLP
Larry A. Jobe
Founder and Chairman of the Board, Legal Network, Ltd.
President and Founder, P 1 Resources, LLC
Alan D. Kennedy
Retired President Worldwide, Tupperware Corporation
Robert A. Toth
Retired President, Avon International
Executive Officers
Robert A. Sinnott, MNS, PhD
Chief Executive Officer and Chief Science Officer
Roy Truett
President of International and Chief Operating Officer
Alfredo Bala
Executive Vice President, Sales & Marketing
Ronald D. Norman
Senior Vice President, International
S. Mark Nicholls
Chief Financial Officer
Independent Public Accountant
BDO USA, LLP
Dallas, Texas
Legal Counsel
Akin Gump Strauss Hauer & Feld LLP
Dallas, Texas
Annual Meeting
Wednesday, June 5, 2013, at 9:00 a.m. Central Time
Grapevine Convention Center
1209 S. Main Street
Grapevine, Texas 76051
Record Date
Friday, April 12, 2013
(determination of shareholders entitled to
receive notice of and to vote at the 2013 Annual
Shareholders’ Meeting)
Shareholders
There were 1,295 shareholders of record, as of
April 12, 2013
Transfer Agent and Registrar
Computershare Investor Services
Shareholder Communications Department
2 LaSalle Street, 3rd Floor
Chicago, Illinois 60602
877.498.8861
www.computershare.com
Market Information
Our common stock trades on the NASDAQ Global
Select Market under the symbol “MTEX.” The following
table contains the reported high and low closing
sales prices for our common stock as reported on the
NASDAQ Global Select Market for the periods indicated:
2012
2011
hiGh
loW
hiGh
loW
1st Quarter
$4.90
$3.55
$20.60 $16.20
2nd Quarter
$7.00
$3.35
$17.50 $9.30
3rd Quarter
$7.68
$5.12
$9.70
$5.30
4th Quarter
$7.74
$4.80
$7.90
$4.00
ANNUAL REPOR T
Our Mission and Vision
Our mission is to fight global malnutrition by nourishing
the world with Real Food Technology® supplementation
while empowering and rewarding the lives of those who
champion our cause.
Our vision is to impact the global epidemic of childhood
malnutrition by linking five million consumers of Real
Food Technology supplementation with five million
children in need.
600 S. Royal Lane, Suite 200, Coppell, TX 75019
Mannatech.com
Live for Real, Mannatech, NutriVerus, Real Passion, Real Possibilities, Real
Products and Stylized M Design are trademarks of Mannatech, Incorporated.
For distribution in the U.S. only.
©2013 Mannatech, Incorporated. All rights reserved.