Mannatech Inc. Annual Report 2016

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ________to ________Commission File No. 000-24657MANNATECH, INCORPORATED(Exact Name of Registrant as Specified in its Charter)Texas 75-2508900(State or other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)600 S. Royal Lane, Suite 200, Coppell, Texas 75019(Address of Principal Executive Offices) (Zip Code)Registrant’s Telephone Number, including Area Code: (972) 471-7400Securities Registered Pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registeredCommon Stock, par value $0.0001 per shareThe Nasdaq Stock Market LLCSecurities Registered Pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No xIndicate 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 o No xIndicate 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 12months (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 oIndicate 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 postedpursuant 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 andpost such files). Yes x No oIndicate 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, tothe 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. oIndicate 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 “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer oAccelerated filer oNon-accelerated filer oSmaller reporting company xIndicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No xAt June 30, 2016, the aggregate market value of the common stock held by non-affiliates of the Registrant was $44,198,311 based on the closing sale price of $20.24, as reported onthe NASDAQ Global Select Market.The number of shares of the Registrant’s common stock outstanding as of February 28, 2017 was 2,700,858 shares.Documents Incorporated by ReferenceMannatech, 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 2015 annualshareholders’ meeting to be filed pursuant to Regulation 14A no later than 120 days after the end of its fiscal year. Table of ContentsTABLE OF CONTENTS PageSpecial Note Regarding Forward-Looking Statements1 Part I Item 1Business2Item 1ARisk Factors22Item 1BUnresolved Staff Comments33Item 2Properties34Item 3Legal Proceedings35Item 4Mine Safety Disclosures35 Part II Item 5Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities36Item 6Selected Financial Data36Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations37Item 7AQuantitative and Qualitative Disclosures About Market Risk53Item 8Financial Statements and Supplementary Data54Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure54Item 9AControls and Procedures54Item 9BOther Information56 Part III Item 10Directors, Executive Officers, and Corporate Governance56Item 11Executive Compensation56Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters56Item 13Certain Relationships and Related Transactions, and Director Independence56Item 14Principal Accountant Fees and Services56 Part IV Item 15Exhibits and Financial Statement Schedule56Item 16Fixing America’s Surface Transportation (FAST) Act56 Signatures Table of ContentsSpecial Note Regarding Forward-Looking StatementsCertain disclosures and analysis in this Form 10-K, including information incorporated by reference, may include forward-looking statements withinthe 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 viewsabout 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 subjectto certain events, risks, assumptions, and uncertainties, including those discussed below and in the “Risk Factors” section in Item 1A of this Form 10-K, andelsewhere 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 underlyingassumptions prove to be incorrect, actual results and developments could materially differ from those expressed in or implied by such forward-lookingstatements. 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 similarwords or the negative of such terms and other comparable terminology. Similarly, descriptions of Mannatech’s objectives, strategies, plans, goals, or targetscontained herein are also considered forward-looking statements. Readers are cautioned when considering these forward-looking statements to keep in mindthese risks, assumptions, and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speakonly 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 includeMannatech, 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 notbeen evaluated by the Food and Drug Administration, also referred to herein as the “FDA”.1Table of ContentsPART IItem 1.BusinessOverviewMannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sellinnovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products that targetoptimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii)Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, theNetherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea,Singapore, Taiwan, Hong Kong, and China). We primarily sell our products and packs through a network of independent associates and members who occupypositions in our network. As of December 31, 2016, we had approximately 222,000 active independent associate and member positions held by individualsin our network associated with the purchase of our products and packs within the last 12 months. In addition, the Company also has a non-direct sellingbusiness in mainland China. Unlike Mannatech's business operations in other markets, Mannatech operates under a cross-border e-commerce model, whereconsumers in China can buy Mannatech products manufactured overseas directly from the Company’s subsidiary via the internet.We primarily sell our products through network marketing, which we believe is the most cost-effective way to quickly and effectively introduce ourproducts and communicate information about our business to the global marketplace. Network marketing minimizes upfront costs, as compared toconventional marketing methods, and allows us to be more responsive to the ever-changing overall market conditions, as well as continue to research anddevelop high quality products and focus on controlled successful international expansion. We believe the network marketing channel also allows us toeffectively communicate the potential benefits and unique properties of our proprietary products to our consumers. In addition, network marketing providesour business-building independent associates with an avenue to supplement their income and develop financial freedom by building their own businesscentered on our business philosophies and unique products. In 2016, we formed our China subsidiary, Meitai Daily Necessities & Health Products Co., Ltd.(“Meitai”). Unlike Mannatech’s business operations in other markets, Meitai operates under a cross-border e-commerce model, where consumers in China canbuy Mannatech products manufactured overseas via Meitai's website. Meitai is currently not a direct selling company in China nor will it operate under amulti-level marketing model in China. Products purchased on Meitai's website are for personal use and not for resale.Our common stock is currently trading on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “MTEX”. Information for each of ourtwo most recent fiscal years, with respect to our net sales, results of operations, and identifiable assets is set forth in the Consolidated Financial Statements ofthis report.Available InformationOn our website (https://www.mannatech.com), we make available free of charge 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 reasonablypracticable after electronically filing or furnishing such material. The SEC maintains a website that contains reports, proxy and information statements, andother information regarding issuers, including Mannatech, that electronically file with the SEC at http://www.sec.gov. Additionally, such materials areavailable in print upon the written request of any shareholder to our principle executive office located at 600 S. Royal Lane, Suite 200, Coppell, Texas75019, Attention: Investor Relations, or by contacting our investor relations department at (972) 471-6512 or IR@mannatech.com.Business Segment, Products and Product DevelopmentBusiness Segment. The Company's primary operating and sole reporting segment is one where we sell proprietary nutritional supplements, skin careand anti-aging products, and weight-management and fitness products through network marketing distribution channels operating in twenty-five countries.Mannatech’s subsidiary in China, Meitai, operates under a cross-border e-commerce model, where consumers in China can buy Mannatech products directlyfrom Meitai via the internet. For more information with respect to the financial results and conditions of this business segment, including financialinformation about geographic areas, see Note 16 to our Consolidated Financial Statements, Segment Information.Products. Scientists have discovered that a healthy body consists of many sophisticated components working in harmony to achieve optimal healthand wellness and requires cellular communication to function at an optimal level. Scientists also discovered that there are more than 200 monosaccharidesthat form naturally. Specific monosaccharides are considered vital components for2Table of Contentscellular communication in the human body. Furthermore, scientists discovered that these monosaccharides attach themselves to certain proteins, which thenform a molecule called glycoprotein. Harper’s Biochemistry, a leading and nationally recognized biochemistry reference, has recognized that these moleculesare found in human glycoproteins, and are believed to be essential in helping to promote and provide effective cell-to-cell communication in the humanbody.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-cellcommunication.•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 helpsprovide support for the immune system.•In 2001, we broadened our proprietary ingredients by developing the Ambroglycin® blend, a balanced food-mineral matrix which helps delivernutrients 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 proprietaryantioxidant Ambrotose AO® product.•In 2006, we introduced a unique blend of plant-based minerals, natural vitamins, and standardized phytochemicals for use in our proprietaryPhytoMatrix® product. We also introduced a compound used in reformulated Advanced Ambrotose® complex. This compound allows a morepotent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe to be produced in a stable powderedform.•In 2007, we introduced into the United States market our skin care and anti-aging 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 internationalmarkets.•In 2008, we introduced a proprietary proteolytic enzyme and phytosterol dietary supplement that supports the body’s natural recovery processesassociated with physical activity in our BounceBack® capsules. We also introduced a proprietary version of whey protein peptide technologythat 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, which is a synbiotic digestive product containingprobiotics, 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 youthfulappearance.•In 2011, we introduced our reformulated version of our Omega-3 supplement, which now includes Vitamin D3 and features EPA/DHA essentialacids. We 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 ricebran, all based on Real Food Technology solutions.•In 2013, we launched Ūth™ skin cream, a breakthrough in anti-aging that incorporates Mannatech’s glyconutrient technology along with amicrosphere delivery system that supports more thorough delivery of the active ingredients to all levels of the skin.•In 2014, we launched GlycoBOOM™ Advanced Immune Support Supplement, packed with nutrients that are designed to support the body’snatural defenses.•In 2015, Mannatech introduced a new brain supplement, Cognitate™, featuring a proprietary blend of natural ingredients to aid memory, recalland cognition.•In 2016, Mannatech rebranded the company, including all new packaging and labels, introduced a line of Essential Oils, along with aninnovative, natural fat-loss system, TruHealthTM. Comprised in the system is the TruPLENISHTM Nutritional Shake, TruPURETM CleanseSlimsticks and TruSHAPETM Fat-Loss Capsules.3Table of ContentsMannatech offers products, which include glyconutrients, a unique category of nutrients sourced from plants and designed to provide a variety ofhealth benefits. We focus on producing products that are from natural sources, as well as other scientifically based efficacious sources.Integrative Health, which offers a variety of nutritional supplements that aid in optimizing overall health and wellness. This category includes avariety of daily nutritional supplements, health solutions for children, and additional nutrients designed to help keep specific body systems at optimal levels.Targeted Health, which gives bodies an extra edge with products designed to target specific areas and provide additional nutrients that helpsupport body system health.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 formulated with more than 30 botanical ingredients that are designed to give the skin a more natural,youthful appearance by moisturizing, hydrating and reducing the appearance of fine lines and wrinkles. In addition, we added our Û th™ skin rejuvenationcrème to our skin care and anti-aging line.Home Living, a category of products designed to make homes a peaceful haven which supplement wellness.The following table summarizes our products by category:Product CategoryRepresentative ProductsIntegrative HealthAmbrotose® complex, Ambrotose AO®, Advanced Ambrotose®, Catalyst™, Cognitate™. Manapol® Powder,MannaBears ™, Nutriverus™, Optimal Support Packets, PhytoBurst™ Nutritional Chews, PhytoMatrix®, PLUS™.Targeted HealthBounceBack®, CardioBALANCE®, GI Pro Balance™ Slimstick, GI-Zyme®, ImmunoSTART®, Manna-C ™,MannaBOOM™ Slimsticks, MannaCLEANSE™, Omega-3 with Vitamin D3 and PhytAloe®.Weight and FitnessAmbroStart®, OsoLean™, SPORT™, TruHealth Fat Loss System, including: TruPLENISH, TruPURE, TruSHAPE,TruCoffee Americano.Skin CareEmprizone ®, FIRM with Ambrotose ®, Û th™ Facial Cleanser, Û th™ Skin Rejuvenation Crème, Û th™ Moisturizer,FreshDen™, Gel Mask, and Organt.Home LivingSerenity Home Diffuser, Essential Oils: Eucalyptus, Fractionated Coconut and Aloe, Frankincense, Lavender,Lemon, No. 1 Protective Blend, Orange, Peppermint, and Sweet Almond and Aloe.A significant portion of our revenue is derived from five products: NutriVerus™, PLUS™, TruHealth, and our core Ambrotose ® complex products,which include the Ambrotose ® products and Advanced Ambrotose® products. Revenue from these products were as follows for the years ended December 31,2016 and 2015 (in thousands, except percentages): 20162015 Sales byproduct% of totalnet salesSales byproduct% of totalnet salesAdvanced Ambrotose ®$55,86331.0%$59,02632.7%Ambrotose ®10,1965.6%9,6865.4%NutriVerus ™7,7244.3%8,5414.7%PLUS ™7,9354.4%8,2394.6%TruHealth9,2205.1%——%Total$90,93850.4%$85,49247.4%4Table of ContentsProduct Development. Our product committee continues to focus on potential new products and compounds that help target or promote overallhealth 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 ourproducts, which allows us to effectively respond to fluctuations in demand with minimal investment and helps control our operating costs. We believe oursuppliers and manufacturers are capable of meeting our current and projected inventory requirements over the next several years. However, as a safetymeasure, we continue to identify and approve alternative suppliers and manufacturers to ensure that our global demands are met in a timely manner and tohelp minimize any risk of business interruption.We procure certain of our products from single vendors who control certain of the product formulations, ingredients, or other intellectual propertyrights associated with such products. Certain of our supply agreements contain exclusivity clauses for the supply of certain raw materials and products, someof which are conditioned upon compliance with minimum purchase requirements. In the event we become unable to source any products or ingredients fromour suppliers, we believe that we would be able to replace those products with alternate suppliers.Industry OverviewNutrition IndustryWe operate in the nutritional supplement industry and distribute and sell our products through our own global network marketing channel. Thenutritional supplement industry is fast-paced, highly fragmented, and intensely competitive. It includes companies that manufacture and distribute productsthat are intended to enhance the body’s performance and well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs,botanicals, and compounds derived therefrom. Prior to 1990, all dietary supplements in the United States were tightly regulated by the FDA and onlyincluded 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 andEducation Act of 1994 (“DSHEA”) was passed in the United States, drastically changing the dietary supplement marketplace. The DSHEA was instrumentalin 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 certaincomponent ingredients.Nutritional supplements are available through mass-market retailers, drug stores, supermarkets, discount stores, health food stores, mail ordercompanies, and direct sales organizations. Direct selling, of which network marketing is a significant segment, has grown significantly and has beenenhanced in the past decade as a distribution channel due to advancements in technology and communications resulting in improved product distributionand faster dissemination of information.Direct Selling/Network Marketing ChannelSince the 1990s, the direct selling and network marketing sales channel has grown in popularity and general acceptance, including acceptance byprominent investors and capital investment groups who have invested in direct selling companies. This has provided direct selling companies withadditional recognition and credibility in the growing global marketplace. In addition, many large corporations have diversified their marketing strategy byentering the direct selling arena. Several consumer-product companies have launched their own direct selling businesses with international operations oftenaccounting for the majority of their revenues. Consumers and investors are beginning to realize that direct selling provides unique opportunities and acompetitive advantage in today’s markets. Businesses are able to quickly communicate and develop strong relationships with their customers, bypassexpensive ad campaigns, and introduce products and services that would otherwise be difficult to promote through traditional distribution channels such asretail 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 World5Table of ContentsFederation of Direct Selling Association, in 2015 approximately 103 million global direct sellers collectively generated annual retail sales of $183.7 billion.Operating Strengths1.High-Quality, Innovative, Proprietary Products. We base our product concept on the scientific belief that certain glyconutrients, also known asmonosaccharides, 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 producingproducts that are from all-natural sources with no synthetic or chemically derived additives. We formulate our products with predominatelynaturally-occurring, plant-derived, carbohydrate-based, safe ingredients that are designed to use nutrients working through normal physiology tohelp achieve and maintain optimal health and wellness, rather than developing common synthetic, carbohydrate-based products.We believe that our patented blends and formulas distinguish us as a leader in the global nutritional supplements industry. We also believethe 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 processesfor the research and development of our unique proprietary product formulas, as well as the identification of quality suppliers and manufacturers. Ourresearch and quality assurance programs are outlined on our corporate websites www.mannatechscience.org, www.mannatech.com, andwww.allaboutmannatech.com.Mannatech’s team of experienced researchers and scientists continually reviews the latest published research data, attends scientificconferences, and draws upon its vast knowledge and expertise to develop new products and support existing ones. In addition, this team works incollaboration with other research firms, universities, institutes, and scientists. Our products have been the focus of numerous pre-clinical and clinicalstudies.To support our research and development efforts, we have strategic alliances with our suppliers, consultants, and manufacturers that allowus 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-drivensuppliers and manufacturers for both our global and regional needs.Research and development costs – relating to new product development, enhancement of existing products, clinical studies and trials, FDAcompliance studies, general supplies, internal salaries, third-party contractors, and consulting fees – were approximately $1.4 million for the yearended December 31, 2016 and $1.7 million for the year ended December 31, 2015.3.Quality Assurance Program. Mannatech uses only qualified manufacturing contractors to produce, test, and package our finished products. Thesecontractors 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 statelegislation;•the Taiwan Food and Drug Administration;6Table of Contents•the Japan Ministry of Health Labor and Welfare;•the Singapore Health Sciences Authority;•the South African Department of Health and Medicines Control Council;•the Hong Kong Food and Environmental Hygiene Department and Department of Health Drug Office; and•the China Food and Drug Administration.We have an established quality assurance program designed to ensure our manufacturers’ compliance with these certifications andguidelines, and to ensure that proper controls are maintained during the manufacturing, evaluation, packaging, storage, and distribution of ourproducts. These controls include a comprehensive supplier audit and surveillance program, third-party certifications, and continuous productmonitoring.A team of professionals, many of whom have extensive experience in the pharmaceutical industry, leads our in-house quality assuranceprogram and continually monitors the quality of our products, including the production process. In addition, they work with suppliers andmanufacturers to develop quality standards for raw material components and products, and perform tests and inspections to ensure that finishedproducts 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 studiesunder 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, numerousproducts have been tested, and:•ten products are certified according to the NSF/ANSI 173 Dietary Supplement Standard—the only American National Standard fordietary supplements. This certification ensures that this product contains only the ingredients indicated on the label and is free ofimpurities, and that Good Manufacturing Practices were used in the manufacturing facility; and•all of Mannatech's dietary supplements have been confirmed to be gluten-free.4.Global Scientific Advisory Board. A charter for an advisory board has been established and the board is filled by a combination of independentscientists and doctors from multiple disciplines, along with two members of Mannatech staff. Members of the Global Scientific Advisory Board(GSAB) review each new and reformulated product to ensure ingredients and products are up to Mannatech’s high standards and are in line with thelatest, viable research. GSAB may also make ingredient and product suggestions for new products.5.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 ourbeginning in 1993. To capitalize on their wealth of knowledge and experience, we sponsor a panel of independent associates, called the “NorthAmerican Associate Advisory Council” (the “Advisory Council”), which helps 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 meetsperiodically with our team of senior management to recommend changes, discuss issues, and provide new ideas or concepts, including a fullspectrum of innovative ideas for additional quality-driven nutritional supplements aimed at maintaining optimal health and wellness.6.Support Philosophy for Our Independent Associates and Members. We are fully committed to providing the highest level of support services to ourindependent associates and members and believe that we meet expectations and build customer loyalty through the following:•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,www.library.mannatech.com, www.events.mannatech.com, www.mannafest.com and www.mannatechlive.com) that provide instantaccess to Internet ordering, marketing, technical and educational information, and unique and innovative marketing tools;7Table of Contents•maintaining an extensive web-based downline management system called Success Tracker™ that provides access to web conferencingand 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;•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; and•sponsoring marketing events, designed to provide information, education, and motivation for our dedicated business-building associatesand to help stimulate business development. These events provide an interactive venue for introducing new products and services andallow interaction between our management teams, outside researchers, and independent associates.7.Flexible Operating Strategy. We believe efficiency, focus, and flexibility are paramount to our operations. For more than a decade, we havecontracted with third parties to supply and manufacture our proprietary raw materials and products, which we believe allows us to minimize capitalexpenditures, 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 ouroperations, we believe we can quickly adapt operations to current demands in a timely, efficient, and cost-effective manner. We monitor theperformance of our third party contractors to ensure they maintain a high quality of service. In addition, we identify alternative sources for our rawmaterials suppliers and finished goods manufacturers to help prevent any risk of interruption in production should any existing contractors becomeunable to perform satisfactorily.8.Experience and Depth of Our Management Team and Board of Directors. We believe that our team of executives has extensive experience in everyaspect of business operations and is highly focused on our success. At December 31, 2016, our Board of Directors is composed of seven directors,including five independent directors. We believe our board members have a wealth of knowledge and experience in most aspects of our businessoperations and are especially well versed in network marketing, finance, nutritional products, regulatory matters, and corporate governance. Ourentire management team is committed to delivering high-quality products and superior service.Business StrategyOur long-term goal is to be one of the world’s leading network marketing companies founded on the best science-based proprietary products byincorporating a powerful global independent network distribution model into our charitable giving program. To achieve our goal, we believe we must focuson the following business priorities:•Strengthening our Financial Results and Adding Value to Our Shareholders and Independent Associates. We focus on improving financialresults 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 careerand compensation plan and periodically offer incentives in order to attract, motivate, and retain independent associates. We believe our globalassociate 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 maximumopportunity to our current independent 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 continueour research efforts and strive to ensure that all of our products are made from high quality, effective ingredients that contain one or more of ourproprietary compounds, which we believe supports our goal to be a cutting-edge industry leader. We expect that any future products we developwill further complement and enhance our existing products.•Provide Outstanding Product Value and Results to Customers. We work to ensure that all associates and their customers have a greatexperience with each of our product. Products that deliver tangible results, are supported by science, and are backed by a powerful satisfactionguarantee.8Table of ContentsIntellectual PropertyTrademarks. We pursue registrations for various trademarks associated with our key products and branding initiatives. As of December 31, 2016, wehad 30 registered trademarks in the United States and six trademark applications pending with the United States Patent and Trademark Office. As ofDecember 31, 2016, we had 429 registered trademarks in 38 countries and 53 trademark applications pending in 10 foreign jurisdictions. Globally, theprotection available in foreign jurisdictions may not be as extensive as the protection available to us in the United States. Where available, we rely oncommon law trademark rights to protect our unregistered trademarks, even though such rights do not provide us with the same level of protection as affordedby a United States federal trademark registration. Common law trademark rights are limited to the geographic area in which the trademark is actually used. AUnited States federal trademark registration enables us to stop infringing use of the trademark by a third party anywhere in the United States provided theunauthorized third party user does not have superior common law rights in the trademark within a specific geographical area of a particular state or regionprior 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 berenewed 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 31,2016, we had 56 patents for technology related to our Ambrotose ® formulation, five of which are in the United States and the remainder of which are in 36foreign jurisdictions. Overall, as of December 31, 2016, 128 patents have been assigned, issued, granted or validated to Mannatech in major global marketsfor the technology relating to ourAmbrotose ®, Ambrotose AO ®, GI-ProBalance™, PhytoMatrix ®, NutriVerus™, and PhytoBurst ® product formulations, as well as in the field of biomarkerassays. Currently, we have 39 patent applications pending in various jurisdictions relating to the technology supporting the above listed products. Patentprotection means that the patented invention cannot be commercially made, used, distributed or sold without the patent owner's consent. These patent rightsare 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 inforce.Associate Distribution SystemOverview. Our sales philosophy is to distribute our products through network marketing channels where consumers purchase products for personalconsumption or resale. Members purchase our products for personal use at a discounted retail value, but do not participate in our global associate career andcompensation plan. Independent associates purchase our products at a discounted wholesale value and are eligible to participate in our global associatecareer and compensation plan. All of our associates are independent contractors. We provide each new independent associate with our policies andprocedures 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. Webelieve the introduction of new innovative incentives, such as travel incentives, will continue to motivate our independent associates and help expand ourglobal purchasing base. We remain actively committed to expanding the number of our independent associates through recruitment, support, motivation, andincentives. We had approximately 222,000 active independent associate and member positions held by individuals purchasing our products or packs duringthe 12 months ended December 31, 2016, and we had approximately 219,000 active independent associate and member positions held by individualspurchasing our products or packs during the 12 months ended December 31, 2015. We have a loyalty program through which consumers earn loyalty pointsfrom qualified automatic orders, which can be applied to future purchases.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 meetindividual 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;9Table of Contents•providing highly personalized and responsive order processing and customer service support accessible by multiple communication channelsincluding telephone, Internet, or e-mail;•offering 24-hour, seven days a week access to information and ordering through the Internet;•offering Success Tracker™, a customized business-building genealogy system, which contains graphs, maps, alerts, reports, and web videoconferencing for our independent associates;•offering, in the United States and Canada, a compilation of online marketing and training tools, including MannaPages; 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 globaltraining/orientation program that uses audio, video and web components to familiarize new associates with the Company, and includes short, segmentedtrainings 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 webmarketing tools specifically designed for associates to use. We also offer a variety of brochures, monthly newsletters, and other promotional materials toassociates to assist in their sales efforts, training, and continuing education. We continually update our training and promotional materials to provide ourassociates with the most current information and motivational tools.Our global associate career and compensation plan consists of ten independent associate achievement levels; from lowest to highest, these includeregional, national, senior national, executive, senior executive, presidential, bronze, silver, gold, and platinum. These achievement levels are determined bythe growth and volume of the independent associates’ direct and indirect commissionable net sales, as well as expanding their networks, which are allassigned a point volume. Promotional materials and training aids are not assigned a point volume. This point volume system, referred to as our globalseamless downline structure, allows independent associates to build their network by expanding their existing downlines into all international marketsexcept China. Our global associate career and compensation plan is intended to comply with all applicable governmental regulations that govern the variousaspects 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 compensationplan remains strong in the industry. Together, our commissions and incentives range approximately from 39% 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 apercentage of the independent associate’s commissionable direct and indirect net product 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 compensationplan fairly compensates our independent associates at every stage of building their business by quickly rewarding an independent associate for both thebreadth and depth of their global seamless downline structure.Our global associate career and compensation plan identifies and pays 18 types of commissions to our qualified independent associates, which arebased 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 qualifying orders;•obtaining and developing certain achievement levels within their downline organizations to qualify for additional bonuses; and•various other incentive programs.Management of Independent Associates. We actively monitor our independent associates’ activities related to sales of our products and thepromotion of certain business opportunities by requiring our independent associates to abide by our policies and procedures. However, we have limitedcontrol over the actions of our independent associates. To aid in our monitoring efforts, we provide each independent associate with a copy of our policiesand procedures prior to or upon signing up as an independent associate. We also use various media formats to distribute changes to our mandatory policiesand procedures, including our corporate website, conference calls, educational meetings, corporate events, seminars, and webcasts.10Table of ContentsOur legal/compliance department, in cooperation with other departments and associates, periodically evaluates the conduct of our independentassociates and the need for new or revised policies and procedures. Our monitoring efforts include reviewing associates’ websites, promotional materials, andmeetings. Our legal/compliance program assists in maintaining high ethical standards among our independent associates, which helps our independentassociates in their sales efforts.To help manage our associates, our legal/compliance department continuously 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 furtherinvestigates such websites. In an effort to decrease the number of independent websites owned by our independent associates and to preserve and protect ourtrademarks, we offer standardized personal web pages to our associates that help them with their sales efforts and provides consistent, standardizedinformation, and education.Our legal/compliance program also provides our independent associates with a standardized and anonymous complaint process. When a complaintis filed against an independent associate, our legal/compliance department conducts a mandatory investigation of the allegations, if warranted. Depending onthe nature of the violation, we may suspend or terminate the non-compliant associate’s agreement or we may impose various sanctions, including writtenwarnings, probation, withholding commissions, and termination of associate status. We will terminate any associate’s agreement for making claims that ourproducts can treat, cure, mitigate or prevent any disease, unless such claim is de minimus and isolated. Product Return Policy. We stand behind our packs and products and believe we offer a reasonable and industry-standard product return policy to allof our customers. We do not resell returned products. Refunds are not processed until proper approval is obtained. All refunds must be processed and returnedin 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 allowour independent associates and members to exchange products as long as the products are unopened and in good condition. Our return policies for our retailcustomers 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 whosold 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 theUnited States and Canada, and for the first 90 days following the product’s purchase in the remaining countries. The independent associate may thenreturn 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 oneyear 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% fee. We may also allow the independent associate or member to receive a full satisfaction guaranteerefund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies inthe 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 daysfollowing the product’s purchase; however, any commissions earned by an independent associate will be deducted from the refund. If we discoverabuse of the refund policy, we may terminate the independent associate’s or member’s account.Information Technology SystemsOur 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 qualificationand 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 andby 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.11Table of ContentsWe also maintain a written business continuity plan, which was developed using the guidelines published by the National Institute of Standards ofTechnology to minimize the risk of data loss due to any interruption in business. Our business continuity plan encompasses all critical aspects of ourbusiness and identifies contacts and resources. Additionally, we perform daily backup procedures and proactively monitor various software, hardware, andnetwork infrastructure systems. We also perform routine maintenance procedures and periodically upgrade our software and hardware to help ensure that oursystems work efficiently and effectively and to minimize the risk of business interruption. Although we maintain an extensive business continuity plan, along-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.Government RegulationsDomestic Regulations. In the United States, governmental regulations, laws, administrative determinations, court decisions, and similar legalrequirements at the federal, state, and local levels regulate companies such as ours and network marketing activities. Such regulations address, among otherthings:•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 Food and Drug Administration (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 SupplementsConcerning the Effect of the Product on the Structure or Function of the Body”. In the rule and its preamble, the FDA distinguished between permitted claimsunder the Federal Food, Drug and Cosmetic Act (the “Act”) relating to the effect of dietary supplements on the structure or functions of the body, andimpermissible 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 Actthat defined current Good Manufacturing Practices in the manufacture and holding of dietary supplements. Effective January 1, 2006, legislation requiredspecific disclosures in labeling where a food, including a dietary supplement, contains an ingredient derived from any of eight named allergens. Legislationpassed 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 anover-the-counter drug that is not covered by new drug approval reporting. The FDA created the Office of Dietary Supplements (“ODSP”) on December 21,2015. The creation of this new office elevates the FDA’s program from its previous status as a division under the Office of Nutrition and Dietary Supplements.ODSP will continue to monitor the safety of dietary supplements.12Table of ContentsThe Dietary Supplement Health and Education Act of 1994, referred to as DSHEA, revised the provisions of the Act concerning the composition andlabeling 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 concerningthe 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 notbeen 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 claimwithin 30 days of first use.The FDA oversees product safety, manufacturing, and product information, such as claims on a product’s label, package inserts, and accompanyingliterature. The FDA has promulgated regulations governing the labeling and marketing of dietary and nutritional supplement products. The regulationsinclude:•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. Anindependent scientist reviews these dossiers, which provide the scientific basis for product claims. We periodically update our substantiation program forevidence 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. Forexample, a product sold as a dietary supplement but marketed as a treatment, prevention, or cure for a specific disease or condition would likely beconsidered by the FDA or other regulatory bodies as unapproved and thus an illegal drug. To maintain the product’s status as a dietary supplement, itslabeling and marketing must comply with the provisions in DSHEA and the FDA’s extensive regulations. As a result, we have procedures in place to promoteand assure compliance by our employees and independent associates related to the requirements of DSHEA, the 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, ingredientlabeling, and nutrient content claims that characterize the level of nutrients in a product. These acts prohibit the use of any specific health claim for dietarysupplements 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 haveinstituted various enforcement actions against numerous dietary supplement companies for false and/or misleading marketing practices, as well as misleadingadvertising of products. These enforcement actions have resulted in consent decrees and significant monetary judgments against the companies and/orindividuals involved. Regulators require a company to convey product claims clearly and accurately and further require marketers to maintain adequatesubstantiation for their claims. More specifically, the FTC requires such substantiation to be competent and reliable scientific evidence and requires acompany to have a reasonable basis for the expressed and implied product claim before it disseminates an advertisement. A reasonable basis is determinedbased 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 forevaluating substantiation is designed to ensure that consumers are protected from false and/or misleading claims by requiring scientific substantiation ofproduct 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 toconform to all requirements is often open to interpretation and debate. However, our policy is to fully cooperate with any regulatory agency in connectionwith any inquiries or other investigations. We can make no assurances that regulators will not question our actions in the future, even though we continue tomake efforts to comply with all applicable regulations, inquiries, and investigations.13Table of ContentsInternational Regulations. We are also subject to extensive regulations in each country in which we operate. Currently we sell our products in threeregions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany,the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan,New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong and China). 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 andDrug 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 ProductsAdministration 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 DietarySupplements, 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 inSingapore;•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 Coderelating 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, theCompanies 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, theLaw on Food products and Food Safety, and various guidelines from the Norwegian Consumers Agency on telephone selling and internetmarketing, 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 variousgovernment agencies such as The Ministry of Health, National Institute of Public Health, State Institute of Drug Control and the CzechAgriculture 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 legislationincluding Estonia Food Act and Medicine Act;14Table of Contents•the Finnish Food Act, the Finnish Food Packaging and Consumer Protection Acts, Act on Unfair Business Practice Act, Decrees and otherregulations in Finland;•the Consumer Protection Act of 2007, the Distance Selling Regulations Act of 2001 in Ireland;•various European Union (“EU”) regulations and pronouncements, subject to local statutes and regulations, address both our selling activitiesand the sale of food supplements in EU member nations, including, primarily, the EU Food Supplement Directive (2002/46/EC) and Nutritionand Health Claims Regulations (2006/1924/EC);•the Food and Drugs (Composition and Labeling) Regulations, the Pyramid Schemes Prohibition Ordinance, the Personal Data (Privacy)Ordinance, and the Import and Export Ordinance in Hong Kong;•the Retail Trade Act of January 15, 1996, regulating both multi-level marketing (article 22) and pyramid sales (article 23), and Spanish Law1/2007 on Consumer Protection (“Spanish Consumers Act”), regulating consumer protection, including warranties and product liability, inSpain;•the Regulation of Act 1700 of 2013, Article 2.2.50 on December 27, 2013 governs the Activities of Network Marketing or Multilevel Marketingcompanies through monitoring compensation plans, contract conditions and enacting preventive suspension, in Colombia; and•the Regulation on the Prohibition of Pyramid Selling, the Regulation on Administration of Direct Sales, the Law on Protection of ConsumerRights, the Food Safety Law, and the Anti-Unfair Competition Law in China.Regulations Regarding Network Marketing System and Our Products. Our network marketing system and our global associate career andcompensation plan are also subject to a number of governmental regulations including various federal and state statutes administered by the FTC, variousstate authorities, and foreign government agencies. The legal requirements governing network marketing organizations are directed, in part, to ensure thatproduct sales are ultimately made to consumers. In addition, earnings within a network marketing company must be based on the sale of products rather thancompensation for (i) the recruitment of distributors or associates, (ii) investments in the organization, or (iii) other non-retail sales-related criteria. Forinstance, some countries limit the amount associates may earn from commissions on sales by other distributors or independent associates that are not directlysponsored by that distributor or independent associate. Prior to expanding our operations into any foreign jurisdiction, we must first obtain regulatoryapproval for our network marketing system in jurisdictions requiring such approval. To help ensure regulatory compliance, we rely on the advice of ouroutside 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 variousUnited 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 independentassociates. 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 departmentto 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 mustmake 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 andterritories, other than Ontario, have legislation requiring that we register or become licensed as a direct seller within that province to maintain the standards ofthe direct selling industry and to protect consumers. Some other Canadian provinces require that both we and our independent associates be licensed as directsellers.In Colombia, our network marketing system is governed by the Regulation Act of 1700 of 2013 on Activities of Network Marketing or MultilevelMarketing. It specifies requirements for our compensation plan, contracts, corporate governance and penalties for violations. Data processing is regulated byAct No. 1581 of 2012 and Regulatory Decree No. 1377 of 2013 which protects personal data and requires that Mannatech to obtain authorization from theowner to collect personal data. The distribution of nutritional supplement products is governed by Invima, which is in charge of inspecting and monitoringthe marketing and manufacturing of health products. 15Table of ContentsIn 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. Foodsupplements and medicines are subject to the Health Law and various Official Mexican Standards, which are enforced by the Health Ministry and The FederalCommission for Protection Against Sanitary Risk. Mexican Customs Law and its regulations govern the general importation of our products into Mexico. Weare 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 theMexican System for Business Information at the appropriate Business Chamber under the Organizations Law.In Australia, our network marketing system is subject to Australia’s federal and local regulations. Our global associate career and compensation planis designed to comply with Australian law and the requirements of Australia’s Trade Practices Act. The Australian Trade Practices Administration and variousother 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.In New Zealand, our network marketing system and our operations are subject to regulations of the Commerce Commission and the Ministry ofHealth, New Zealand Medical Devices Safety Authority, the Unsolicited Goods Act of 1975, the Privacy Act of 1993, and the Fair Trading Act of 1993. Theseregulations enforce specific kinds of business or trade practices and regulate the general conduct of network marketing companies. The CommerceCommission also enforces the Consumer Guarantees Act, which establishes specific rights and remedies with respect to transactions involving the provisionsof goods and services to consumers. Finally, the New Zealand Commerce Commission and the Ministry of Health both enforce the Door-to-Door Sales Act of1967 and the NZ Medicines Act, which govern the conduct of our independent associates.In Japan, our network marketing system, overall business operations, trade practices, global associate career and compensation plan, and ourindependent associates are governed by Japan’s Door-to-Door Sales Law as enacted in 1976 by the Ministry of International Trade and Industry. Our globalassociate career and compensation plan is designed to meet Japan’s governmental requirements. Our product claims are subject to the Pharmaceutical AffairsLaw, which prohibits the making and publication of “drug effectiveness” claims regarding products that have not received approval from Japan’s Ministry ofHealth, Welfare and Labor.In Singapore, the network marketing industry is governed by the Multi-Level Marketing and Pyramid Selling (Prohibition) (Amendment) Act andthe accompanying Pyramid Selling (Excluded Schemes and Arrangements) Order 2000 and Order 2001. General business practices and advertising areregulated under the Consumer Protection (Fair Trading) Act 2003, as amended, and its accompanying regulations. The products are classified as food andsupplements 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 levelof medicinal and other health-related products are regulated under various regulations such as the Medicines Act, the Poisons Act, the Sale of Drugs Act, theMedicines (Advertisement and Sale) Act and the Misuse of Drug Regulations.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 networkmarketing companies and affiliated distributors. The Door-to-Door Sales Act is enforced by the Fair Trade Commission. In the Republic of Korea, ourproducts 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 ProtectionLaw. Such laws contain a wide range of provisions covering trade practices. Our products are governed by the Taiwan Department of Health and variouslegislation in Taiwan including the Health Food Control Act of 1999. This Act was enacted to enhance the management and supervision of matters relatingto health, food, protecting the health of people and safeguarding the rights and interests of consumers.In Hong Kong, our network marketing system, overall operations and trade practices are governed by a number of Ordinances including the Sale ofGoods Ordinance, the Control of Exemption Clauses Ordinance, the Pyramid Schemes Prohibition Ordinance and the Personal Data (Privacy) Ordinance.Such Ordinances include a number of consumer protections (including data privacy) and regulate trading practices. Importation and registration of ourproducts permitting their sale in Hong Kong are controlled by the Import and Export Ordinance and its subsidiary legislation, the Import and Export(Registration) Regulations.16Table of ContentsIn China, multi-level marketing is prohibited by the Regulation on the Prohibition of Pyramid Selling. While selling products via a direct saleschannel is permitted, persons or entities conducting direct selling activities must have a direct selling license per the Regulation on the Administration ofDirect Sales. In addition, under the Food Safety Law, most of our dietary supplements are not allowed to be sold in physical stores unless registered with theChina Food Safety Administration. However, those products are allowed to be sold under a retail cross-border e-commerce model. Lastly, overall operationsand trade practices are governed by the Consumer Protection Law and the Anti-Unfair Competition Law.In the United Kingdom, our network marketing system is subject to national regulations of the United Kingdom. Our global associate career andcompensation plan is designed to comply with the United Kingdom’s national requirements, the requirements of the Fair Trading Act of 1973, the DataProtection Act of 1998, the Trading Schemes Regulations of 1997, and other similar regulations. The U.K. Code of Advertising and Sales Promotion regulatesour business and trade practices and the activities of our independent associates, while the Trading Standards Office regulates any claims or representationsrelating to our operations. Our products are regulated by the Medicines and Healthcare Products Regulatory Agency.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 hishome, place of work, or other non-public place in order to conclude a contract on certain subjects. However, the prohibition has an exemption when theconsumer asks the trader for a contact in writing or upon written prior consent. In addition, the Danish Marketing Practices Act, the Guidelines from theDanish Consumerombudsman and the rules contained in the Danish Consumer Contracts Act govern our network marketing system. There is no requirementfor pre-approval of our products in Denmark; however, our products are subject to a yearly inspection carried out by the Food authorities. Further, all ouractivities 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 dietarysupplements 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 certainsubstances), before a product may be lawfully marketed in Denmark. Full product compliance with all Danish provisions is reviewed by the Food authoritiesonce a year.In Germany, there is no specific legal regulation covering network marketing company practices. However, under certain circumstances networkmarketing systems may have to follow the German Unfair Competition Act. Our independent associates’ conduct is subject to the German statute that governsthe conduct of a commercial agent. In addition, direct selling operations are governed by the Industrial Code, which requires direct sellers to hold itineranttrader’s cards. The German Regulation on food supplements and the German Law on food and feed govern vitamin and mineral substances and herbs andother substances, respectively.In Austria, the Austrian Trade Law of 1994 (Novelle 2002) prohibits the offer of direct sale to an individual consumer of food supplement andcosmetic 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 Economyand Labor. Our business operations within Austria are conducted from beyond the borders of Austria, which is the common practice in our industry. Ourdistributors qualify as “traders” for purposes of Austrian state and municipal laws. Traders are regulated by the local chambers of commerce and must obtainlicenses from the respective chambers of commerce. Regulation of food supplements and cosmetics is generally harmonized throughout the EU and mustconform 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 FoodSecurity, 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 businessactivities. The Food Act (2006) provides regulations and guidelines for the sale of food and food supplements. We are subject to the authority of the SwedishConsumer Office, the Swedish Companies Registration Office, the Swedish Tax Office, Swedish Customs, Medical Products Agency, and the National FoodAdministration. 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 businesspractices. 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 thoseregulations dealing with general terms and conditions, and those regarding misleading advertising.17Table of ContentsNorway exercises a border control of products and their composition upon importation. Import products must be registered in an Import ReportingRegistry, and the regulations are enforced by the customs authorities. Our products must be compliant with Norwegian regulations in order to be admitted foradmission through customs into Norway. In Norway Door-to-Door Selling is allowed, provided the Guidelines from the Norwegian Consumer Agency arefollowed. Likewise, telephone-selling is allowed provided the agency’s guidelines are followed. Home-selling in Norway is also allowed. All of our sales inNorway are subject to a 14-day right to cancel by the consumers.In the Czech Republic, there are no specific regulations or special legislation that limit the network marketing industry. Network marketing isconsidered 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), whichrequires sales distributors to maintain a trade license. Additionally, the regulation of food supplements is harmonized throughout the EU and, therefore, thesupplements must conform to the EU standards. Enforcement of Czech-specific regulations is undertaken by the Ministry of Health, National Institute ofPublic 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 ConsumerProtection Act. Also, independent distributors are required to register as sole proprietors with the Tax and Customs Board before entry into associateagreements. Mannatech must also comply with various EU regulations. The Veterinary and Food Board also enforces local legislation including EstoniaFood Act and Medicine Act.In Finland, the Finnish Food Act, the Finnish Food Packaging and Consumer Protection Acts, Act on Unfair Business Practice Act, Decrees and otherregulations, 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 SafetyAuthority when marketing and selling in Finland. A notification is also required when the composition of preparation changes in terms of characteristics ofsubstances 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 lawto 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.In Spain, our network marketing system, overall operations, and trade practices are governed by the Retail Trade Act and the Spanish ConsumersAct. Such laws contain a wide range of provisions covering trade practices, including multi-level marketing, pyramid sales, warranties and product liability.While regulation of food supplements and cosmetics is generally harmonized throughout the EU and must conform to EU standards, the Spanish Agency forMedicines and Health Products oversees cosmetics and the Spanish Agency for Consumer Affairs, Food Safety and Nutrition oversees food supplements.In South Africa, the Consumer Affairs Act 1988, the Competition Act 1998, and the Advertising Standards Authority Code of Advertising Practice (avoluntary code enforced by the media) govern business practices. The products are classified as complementary medicines for which there are no specificregulations. The Foodstuffs, Cosmetics and Disinfectants Act 1972, and the Medicines and Related Substances Act 1965 currently apply.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;18Table of Contents•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 offperiods 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 ourindependent 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 stepsto 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 overlyscrutinized by regulatory authorities. This review could result in our products being re-classified as drugs or classified into another product category thatrequires 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 andcompensation plan, and our products and sales aids within each of the countries in which we sell our products. We provide education for our independentassociates 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 consistentmanner.CompetitionOther Nutritional Supplement Companies. The nutritional supplement industry is steadily gaining momentum and is intensely competitive. Ourcurrent direct competitors selling similar nutritional products include:•AdvoCare International•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.19Table of ContentsNetwork Marketing. Nutritional supplements are offered for sale in a variety of ways. Network marketing has a limited number of individualsinterested in participating in the industry, and we must compete for those types of individuals. We believe network marketing is the best sales approach tosell 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 independentassociates. 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; and•Usana Health Sciences, Inc.The availability of independent associates decreases when other network marketing companies successfully recruit and retain independentassociates 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;•our 23 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.20Table of ContentsEmployeesAt December 31, 2016 and 2015, we employed 290 and 287 people, respectively, as set forth below: 2016 2015Americas185 181Asia/Pacific80 77EMEA25 29Total290 287 2016 2015Full-time employees281 282Part-time employees9 5Total290 287These numbers do not include our independent associates, who are independent contractors and are not employees.21Table of ContentsItem 1A.Risk FactorsIn 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 ourpacks and products. We cannot give any assurances that the number of our independent associates will continue at their current levels or increase in thefuture. 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, 2016, we had approximately 222,000 active independent associates and member positions held by individuals who purchasedour products within the last 12 months, of which 137 occupied the highest associate levels under our global compensation plan. These independent associateleaders 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 inthe independent associates’ networks of downlines, whether by their own choice or through disciplinary actions by us for violations of our policies andprocedures, 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 achievedesired 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 fromtime 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.We are planning to modify our associate compensation plan during 2017. Because of the size of our associate force and the complexity of ourcompensation plans, it is difficult to predict how independent associates will view such changes and whether such changes will negatively impact ourrevenue and profitability.22Table of Contents4.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 andincentives range approximately from 39% to 43% of our consolidated net sales. We closely monitor the amount of commissions and incentives as apercentage of net sales, and may periodically adjust our compensation plan to better manage these costs. There can be no assurance that changes to thecompensation plan will be successful in achieving target levels of commissions and incentives as a percentage of net sales and preventing these costs fromhaving a significant adverse effect on our earnings. Furthermore, such changes may make it difficult to attract and retain independent associates or cause us tolose 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 leadersand are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive officers, to compensate our executiveofficers at attractive levels, and to continue to attract additional qualified individuals to our management team. Although we have entered into employmentagreements 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, wecannot assure 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 seniormanagement team, including our regional and country managers, or the inability to attract additional qualified management personnel could have a materialadverse 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 besubject 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 inlegislation and regulations could affect our business. Furthermore, significant penalties could be imposed on us for failure to comply with various statutes orregulations. 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 oradvertising claims that violate laws or regulations, which could result in claims against us that could harm our financial condition and operatingresults.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 beno assurance that our associates will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our associatepolicies and procedures. All independent associates sign a written contract and agree to adhere to our policies and procedures, which prohibit associates frommaking false, misleading or other improper claims regarding products or income potential from the distribution of the products. However, independentassociates may from time to time, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information thatdoes not accurately describe our marketing program. There is a possibility that some jurisdictions could seek to hold us responsible for independentassociate activities that violate applicable laws or regulations, which could result in government or third party actions or fines against us, which could harmour financial condition and operating results.23Table of Contents8.We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm ourfinancial condition and operating results.Our independent associates are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us tocollect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of beingresponsible for social security and similar taxes with respect to our distributors. In the event that local laws and regulations require us to treat our independentdistributors as employees, or if our distributors are deemed by local regulatory authorities to be our employees, rather than independent contractors, we maybe held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financialcondition and operating results.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 systemor elements of our business. In the United States, the network marketing industry and regulatory authorities have relied on the implementation of distributorrules and policies designed to promote retail sales to protect consumers, prevent inappropriate activities, and distinguish between legitimate networkmarketing distribution plans and unlawful pyramid schemes. We have adopted rules and policies based on case law, rulings of the FTC, discussions withregulatory authorities in several states, and domestic and global industry standards. Legal and regulatory requirements concerning network marketingsystems, however, involve a high level of subjectivity, are inherently fact-based, and are subject to judicial interpretation. Because of this, we can provide noassurance that we would not be harmed by the application or interpretation of statutes or regulations governing network marketing, particularly in any civilchallenge 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 independentassociates have significantly violated a law or regulation could adversely affect our business. The laws and regulations for network marketing intend toprevent fraudulent or deceptive schemes. Our business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given toregulators, periodic misconduct by our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing lawsor regulations.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 thefederal, 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 offoreign 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.24Table of ContentsAny unexpected new regulations or changes in existing regulations could significantly restrict our ability to continue operations, which couldadversely affect our business. For example, changes regarding health and safety and food and drug regulations for our nutritional products could require us toreformulate 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 anddrug regulations could delay or prevent our introduction of new products or suspend or prohibit the sale of existing products in a given country ormarketplace. In addition, if we expand into other foreign markets, our operations or products could also be affected by the general stability of such foreigngovernments and the regulatory environment relating to network marketing and our products. If our products are subject to high customs duties, our sales andcompetitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain countries and jurisdictions could limitour 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 tonutritional supplements could result in more restrictive regulations and harm our results if our supplements or advertising activities are found toviolate 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 tonew regulations.There has been an increasing movement in the United States and other markets to increase the regulation of dietary supplements, which couldimpose additional restrictions or requirements on us and increase the cost of doing business. The FDA created the Office of Dietary Supplements (“ODSP”) onDecember 21, 2015. The creation of this new office elevates the FDA’s program from its previous status as a division under the Office of Nutrition and DietarySupplements. ODSP will continue to monitor the safety of dietary supplements.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, makechanges in some classifications of supplements under the regulations, or limit the claims we can make. In addition, there has been increased regulatoryscrutiny of nutritional supplements and marketing claims under existing and new regulations. In Europe, for example, we are unable to market supplementsthat contain ingredients that have not been previously marketed in Europe without going through an extensive registration and approval process. Europe isalso expected to adopt additional regulations in the future to set new limits on acceptable levels of nutrients. South Africa has also implemented new“complementary medicine” legislation, which requires a significant dossier in order to register current and new products. Mannatech is working towardcomplying with the new legislation and is in contact with the Direct Selling Association in South Africa. In August 2016, the FDA published its revised draftguidance on Dietary Supplements: New Dietary Ingredient Notifications and Related Issues. If a company sells a dietary supplement containing an ingredientthat FDA considers either not a dietary ingredient or a new dietary ingredient (“NDI”) that needs an NDI notification, the agency may threaten or initiateenforcement against the Company. For example, it might send a warning letter that can trigger consumer lawsuits, demand a product recall, or even work withthe Department of Justice to bring a criminal action. Our operations could be harmed if new guidance or regulations require us to reformulate products oreffect new registrations, if regulatory authorities make determinations that any of our products do not comply with applicable regulatory requirements, if thecost of complying with regulatory requirements increases materially, or if we are not able to effect necessary changes to our products in a timely and efficientmanner to respond to new regulations. In addition, our operations could be harmed if governmental laws or regulations are enacted that restrict the ability ofcompanies 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, usedin the majority of our products;•the MTech AO Blend® formulation, our proprietary antioxidant technology 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.25Table of ContentsWe have filed patent applications for the technology relating to our Ambrotose ®, Ambrotose AO ®, PhytoMatrix ® , NutriVerus™, PhytoBurst®, andGI-ProBalance ®™ products in the United States and certain foreign countries. As of December 31, 2016, we had received 56 patents for the technologyrelating to Ambrotose ® complex, five of which were issued in the United States and the remainder of which were issued, granted, and validated in 36 foreignjurisdictions. In addition, we have entered into confidentiality agreements with our independent associates, suppliers, manufacturers, directors, officers, andconsultants to help protect our proprietary rights. Nevertheless, we continue to face the risk that our pending patent applications for our products may notissue or that the patent protection granted is more limited than originally requested. As a precaution, we consult with outside legal counsel and consultants tohelp ensure that we protect our proprietary rights. However, our business, profitability, and growth prospects could be adversely affected if we fail to receiveadequate protection of our proprietary rights.Although there are several patents expiring in late 2017 related to the Ambrotose ® technology, Mannatech continues to actively explore additionalpatent protection of its technology and pursue expanded patent protection strategies. Mannatech has a number of pending patent applications for additionalprotection of Ambrotose ®-related technology. Four of these patents have already issued, and the remaining patent applications are at various stages ofprocessing, depending on the timeline of each market’s patent offices.Most of our patents for the Ambrotose AO ®, GI-ProBalance ®™, PhytoMatrix ®, NutriVerus™, PhytoBlend and rapid saccharide and serumformulations do not expire for another eight or more years.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 could be harmed. In addition, if any new products fail to gain marketacceptance, are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our abilityto continue to introduce new products include, among others, government regulations, the inability to attract and retain qualified research and developmentstaff, the termination of third-party research and collaborative arrangements, proprietary protections of competitors that may limit our ability to offercomparable 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 couldsignificantly harm our relationship with independent associates and members, our product sales, as well as our financial condition and operatingresults.Our business is subject to changing consumer trends and preferences, including rapid and frequent changes in demand for products, new productintroductions, and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turncould harm our independent associate and member relationships and cause the loss of sales. The success of our new product offerings and enhancementsdepends 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 independent associates, members and customers in atimely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition, and operating results.26Table of Contents16.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 outsidesuppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our ability to enter new markets and sustain satisfactory levelsof sales in each market depends on the ability of our outside suppliers and manufacturers to provide required levels of ingredients and products and tocomply with all applicable regulations. As a precaution, we have approved alternate suppliers and manufacturers for our products. However, the failure of ourprimary 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, exceptArabinogalactan. Due to the unique nature of Arabinogalactan, an important component used in the formulation of our Ambrotose ® complex, we are unableto identify an alternative supplier at this time. If our suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect ourbusiness.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 fromthird-party suppliers. In the event we were to lose any significant suppliers and have trouble in finding or transitioning to alternative suppliers, it could resultin product shortages or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide our contractmanufacturers 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 alsosubject to delays caused by any interruption in the production of these materials including weather, crop conditions, climate change, transportationinterruptions and natural disasters or other catastrophic events.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 noassurances that we will not be exposed to any substantial future product liability claims. Such claims may include claims that our products containcontaminants, that we provide our independent associates and consumers with inadequate instructions regarding product use, or that we provide inadequatewarnings concerning side effects or interactions of our products with other substances. We believe that we, our suppliers, and our manufacturers maintainadequate product liability insurance coverage. However, a substantial future product liability claim could exceed the amount of insurance coverage or couldbe 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 causedconcern among the general public. As a result, some countries have banned the importation or sale of products that contain bovine materials sourced fromlocations 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 availableor practical for use, certifications are required to ensure the capsule material is BSE-free. The higher costs could affect our financial condition, results ofoperations, and our cash flows.27Table of Contents19.Concentration RiskA significant portion of our revenue is derived from five products: NutriVerus™, PLUS™, TruHealth, and our core Ambrotose ® complex products,which include the Ambrotose ® products and Advanced Ambrotose® products. A decline in sales value of such products could have a material adverse effecton our earnings, cash flows, and financial position. Revenue from these products were as follows for the years ended December 31, 2016 and 2015 (inthousands, except percentages): 20162015 Sales byproduct% of totalnet salesSales byproduct% of totalnet salesAdvanced Ambrotose ®$55,86331.0%$59,02632.7%Ambrotose ®10,1965.6%9,6865.4%NutriVerus ™7,7244.3%8,5414.7%PLUS ™7,9354.4%8,2394.6%TruHealth9,2205.1%——%Total$90,93850.4%$85,49247.4%Our business is not currently exposed to customer concentration risk given that no independent associate has ever accounted for more than 10% ofour consolidated net sales.20.If we incur substantial liability from litigation, complaints, or enforcement actions or incur liabilities or penalties resulting from misconduct byour 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 usevarious means to address misconduct by our independent associates, including maintaining policies and procedures to govern the conduct of ourindependent associates and conducting training seminars, it is still difficult to detect and correct all instances of misconduct. Violations of our policies andprocedures 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 policiesand procedures for our independent associates differ depending on the different legal requirements of each country in which an independent associate doesbusiness. Any future litigation, complaints, and enforcement actions involving us and/or our independent associates could consume considerable amounts offinancial and other corporate resources, which could have a negative impact on our business, profitability, and growth prospects.21.The global nutrition and skin care industries are intensely competitive and the strengthening of any of our competitors could harm our business.The global nutrition and skin care industries are intensely fragmented and competitive. We compete for independent associates with other networkmarketing companies outside the global nutrition and skin care industries. 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 pricingcampaigns that may influence our continuing and potential independent associates and members to buy products from competitors rather than from us. Suchcompetition could adversely affect our business and current market share.28Table of Contents22.A downturn in the economy could affect consumer purchases of discretionary items such as the health and wellness products that we offer, whichcould 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 couldadversely impact consumer purchases of discretionary items such as health and wellness products. In past years, the United States and global economiesslowed dramatically as a result of a variety of problems, including turmoil in the credit and financial markets, concerns regarding the stability and viability ofmajor financial institutions, the state of the housing markets, and volatility in worldwide stock markets. In the event of such economic downturn, the U.S. andglobal economies could become significantly challenged in a recessionary state for an indeterminate period of time. These economic conditions could causemany of our existing and potential associates to delay or reduce purchases of our products for some time, which in turn could harm our business by adverselyaffecting our revenues, results of operations, cash flows and financial condition. We cannot predict these economic conditions or the impact they would haveon our consumers or business.23.If our international markets are not successful, our business could suffer.We currently sell our products in the international markets of Canada, Mexico, Colombia, Austria, the Czech Republic, Denmark, Estonia, Finland,Germany, the Republic of Ireland, Namibia, Netherlands, Norway, South Africa, Spain, Sweden, the United Kingdom, Australia, Japan, New Zealand, theRepublic of Korea, Singapore, Taiwan, Hong Kong and China. We operate in China on a non-direct selling business model instead of our traditional networkmarketing model. In China, multi-level marketing is prohibited by the Prohibition of Pyramid Selling and direct selling without a license is prohibited by theRegulation on the Administration of Direct Sales. Our international operations could experience changes in legal and regulatory requirements, as well asdifficulties in adapting to new foreign cultures and business customs. If we do not adequately address such issues, our international markets may not meetgrowth 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;•changes in the perception of network marketing; and•risk of our independent associates offering business opportunities in China.Any negative changes related to these factors could adversely affect our business, profitability, and growth prospects. Furthermore, any negativechanges in our distribution channels may force us to invest significant time and money related to our distribution and sales to maintain our position incertain international markets.29Table of Contents24.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 couldnegatively affect the public’s perception about our industry, our products, or our reputation and could result in a significant decline in our operations and/orthe number of our independent associates. Specifically, we are susceptible to adverse or negative publicity regarding:•the nutritional supplements industry;•skeptical consumers;•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.25.If our information technology system fails or if the implementation of new information technology systems is not executed efficiently andeffectively, our business, financial position, and our operating results could be adversely affected.Like many companies, our business is heavily dependent upon our information technology infrastructure to effectively manage and operate many ofour 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 andbusiness continuity program that was developed under the guidelines published by the National Institute of Standards of Technology, a long-term failure orimpairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business.Occasionally information technology systems must be upgraded or replaced and if this system implementation is not executed efficiently andeffectively, the implementation may cause interruptions in our primary management information systems, which may make our website or servicesunavailable thereby preventing us from processing transactions, which would adversely affect our financial position or operating results.With increased frequency in recent years, cyber-attacks against companies have resulted in breaches of data security. Our business requires thestorage and transmission of suppliers’ data and our independent associates’ personal, credit card, and other confidential information. Our informationtechnology systems are susceptible to a growing and evolving threat of cybersecurity risk. Any substantial compromise of our data security, whetherexternally or internally, or misuse of associate data, could cause considerable damage to our reputation, cause the public disclosure of confidentialinformation, and result in lost sales, significant costs, and litigation, which would negatively affect our financial position and results of operations.30Table of Contents26.Taxation and transfer pricing affect our operations and we could be subjected to additional taxes, duties, interest, and penalties in materialamounts, 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 designedto ensure that our intercompany transactions are consummated at prices that have not been manipulated to produce a desired tax result, that appropriatelevels of income are reported as earned by the local entities, and that we are taxed appropriately on such transactions. Regulators closely monitor ourcorporate structure, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structure, transferpricing methodologies or intercompany transfers, our operations may be harmed and our effective tax rate may increase. Scrutiny has increased with theadvent of the OECD Base Erosion and Profit Shifting project.A change in applicable tax laws or regulations or their interpretation could result in a higher effective tax rate on our worldwide earnings and suchchange could be significant to our financial results. In the event any audit or assessments are concluded adversely to us, these matters could have a materialimpact on our financial condition.27.Currency exchange rate fluctuations could reduce our overall profits.For the year ended December 31, 2016, we recognized 70.5% of net sales in markets outside of the United States and 61.1% in markets outside ofNorth America. For the year ended December 31, 2015, we recognized 68.2% of net sales in markets outside of the United States and 59.3% in marketsoutside of North America. In preparing our consolidated financial statements, we are required to translate certain financial information from foreign currenciesto the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable localcurrencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. For example, while our 2016 net sales grew0.9% on a Constant dollar basis (see Item 7, Non-GAAP Financial Measures), unfavorable foreign exchange caused a $1.7 million decline in GAAP net salesas compared to 2015. In other words, sales would have been $1.7 million higher, except for the unfavorable impact of foreign exchange. There can be noassurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operationsor cash flows. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon ourfuture 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 ourcommon 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 demand and daily trading volume of our shares;•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 quotedprices of the securities of many companies. The changes sometimes appear to occur without regard to specific operating performance. The price of ourcommon 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.31Table of Contents29.Certain shareholders, directors, and officers own a significant amount of our stock, which could allow them to influence corporate transactionsand other matters.As of December 31, 2016, our directors and executive officers collectively with their families and affiliates, beneficially owned approximately17.1% 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 shareholdervote on the election of directors, the adoption of stock option plans, the adoption or amendment of provisions in our articles of incorporation and bylaws, orthe 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 toacquire our Company, even if the proposal may benefit our shareholders. Our articles of incorporation authorize the issuance of preferred stock withoutshareholder 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 toissue one or more series of preferred stock without shareholders’ approval could deter or delay unsolicited changes of control by discouraging open marketpurchases of our common stock or a non-negotiated tender or exchange offer for our common stock. Discouraging open market purchases may bedisadvantageous 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. Ourbylaws provide that directors are elected by a plurality vote and that directors can only be removed for cause upon the affirmative vote of the holders of amajority of the issued and outstanding shares entitled to be cast for the election of such directors. Furthermore, our bylaws establish advance noticerequirements for nominations for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings. Inaddition, the Texas Business Organization Code restricts, subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of theseprovisions 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.31.Our failure to comply with the NASDAQ Global Select Market continued listing standards may adversely affect the price and liquidity of ourshares 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 uponcompliance with various continued listing standards. There can be no assurance that we will continue to satisfy the requirements for maintaining listing onNasdaq. If we are unsuccessful in maintaining compliance with the continued listing requirements of Nasdaq, then our common stock could be delisted. If ourcommon stock is delisted and we cannot obtain listing on another major market or exchange, our common stock’s liquidity would suffer, and we would likelyexperience reduced investor interest. Such factors may result in a decrease in our common stock’s trading price. Delisting may also restrict us from issuingadditional securities or securing financing.As of the date of issuance of this report, we were in compliance with the continued listing requirements. However, we cannot assure you that we willbe 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 lawstipulating that dividends may not be paid if payment therefore would cause the corporation to be insolvent or if the amount of the dividend would exceedthe surplus of the corporation. Our Board of Directors may decide not to declare dividends or we could be prevented from declaring a dividend because oflegal or contractual restrictions. The failure to pay dividends could reduce our stock price.32Table of Contents33.We rely upon our existing cash balances and cash flow from operations to fund our business and meet our contractual obligations. In the eventthat we do not generate adequate cash flow from operations, we will need to raise money through a debt or equity financing, if available, orcurtail 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 salesand/or reduce operating costs and some of these costs are fixed contractual obligations. As of December 31, 2016 and 2015, cash and cash equivalents held inbank accounts in foreign countries totaled $27.5 million and $31.3 million, respectively.We maintain supply agreements with our suppliers and manufacturers. Certain of our supply agreements contain exclusivity clauses for the supplyof certain raw materials and products, some of which are conditioned upon compliance with minimum purchase requirements. One of our supply agreements,under which the supplier provides us with certain aloe vera-based products, requires us to purchase products in an aggregate amount of $19.0 million through2020. Failure to satisfy minimum purchase requirements could result in the loss of exclusivity, which could adversely affect our business.If we are unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secureadditional funding through a debt or equity financing, transfer cash in a manner that could be taxed, significantly scale back our operations, and/ordiscontinue many of our activities, which could negatively affect our business and prospects. Additional funding may not be available or may only beavailable on unfavorable terms.34.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 formssimilar to other SEC reporting companies; however, the information disclosed may differ and be less comprehensive. If some investors find our common stockless attractive as a result of less comprehensive information we may disclose pursuant to the exemptions available to us as a smaller reporting company, theremay 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 doesnot 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 notmaterial, may also adversely affect our business operations.Item 1B.Unresolved Staff CommentsNone.33Table of ContentsItem 2.PropertiesWe lease property at several locations for our headquarters and distribution facilities, including:Location Size Expiration date Coppell, Texas (corporate headquarters) 110,000 sq. feet March 2018Coppell, Texas (distribution center) 75,000 sq. feet(1) March 2018St. Leonards, Australia (Australian headquarters) 850 sq. meters(2) December 2018Milton Park, Oxfordshire (U.K. headquarters) 3,240 sq. feet August 2017Shibuya-ku, Tokyo, Japan (Japanese headquarters) 150 Tsubos(3) September 2019Chuo-ku, Osaka, Japan (Japanese training center) 73 Tsubos(4) August 2020Gangnam-gu, Seoul, Korea (Republic of Korea headquarters) 718 Pyong(5) June 2018Seo-gu, Daejun, Korea (Regional center) 113 Pyong(6) June 2017Haewoondae-gu, Busan, Korea (Pusan training center) 191 Pyong(7) March 2017Incheon, South Korea (Incheon training center) 218 Pyong(8) April 2017Seoul, South Korea (office) 99 Pyong(9) June 2018Taipei, Taiwan (Taiwan headquarters) 172 Pings(10) February 2020Kaohsiung, Taiwan (Taiwan training center) 102 Pings(11) June 2020Zug, Switzerland (Switzerland headquarters) 680 sq. meters(12) — (19)Tsim Sha Tsui, Kowloon, Hong Kong (office) 4,334 sq. feet June 2019Hengqin, Zhuhai, China (office) 677 sq. feet November 2017Tianhe, Guangzhou, China (office) 355 sq. feet July 2017Richmond, BC (Canada training center) 1,963 sq. feet September 2017Markham, ON (office) 1,714 sq. feet September 2019Bedfordview, South Africa (office) 383 sq. meters(13) — (20)Guadalajara, Mexico (Mexico headquarters) 389 sq. meters(14) March 2017Mexico City, Mexico (customer service center) 123 sq. meters(15) September 2017Monterrey, Mexico (office) 149.16 sq. meters(16) June 2017Tuxtla, Mexico (office) 23.76 sq. meters(17) October 2017Colima, Mexico (office) 68 sq. meters(18) March 2017Singapore (meeting center) 1,098 sq. feet September 2018Bogota, Columbia (office) 700 sq. feet — (19) (1) The Company subleases a majority of this space to Integrated Distribution andLogistics Direct, LLC, which provides warehousing and distribution services.(2) Approximately 9,150 square feet & subleases 2,153 sq. ft. to Morrison DesignPartnership.(3) Approximately 5,338 square feet.(4) Approximately 2,598 square feet.(5) Approximately 25,549 square feet.(6) Approximately 4,021 square feet. (7) Approximately 6,796 square feet.(8) Approximately 7,757 square feet.(9) Approximately 3,523 square feet.(10) Approximately 6,119 square feet.(11) Approximately 3,629 square feet.(12) Approximately 7,320 square feet.(13) Approximately 4,123 square feet.(14) Approximately 4,187 square feet.(15) Approximately 1,324 square feet.(16) Approximately 1,606 square feet.(17) Approximately 256 square feet.(18) Approximately 732 square feet.(19) Renewable annually.(20) Renewable monthly.To maximize our operating strategy and minimize costs, we contract with third-party distribution and fulfillment facilities in our three regions: (i)the Americas, (ii) EMEA and (iii) Asia/Pacific. By entering into these third-party distribution facility agreements, our offices maintain flexible operatingcapacity, minimize shipping costs, and are able to process an order within 24-hours after order placement and receipt of payment.34Table of ContentsItem 3.Legal ProceedingsSee Note 13 to our Consolidated Financial Statement, Litigation, which is incorporated herein by reference.Item 4.Mine Safety DisclosuresNot Applicable.35Table of ContentsPART IIItem 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesMarket for Our Common Stock . On February 12, 1999, we completed our initial public offering. Our common stock is currently trading on Nasdaq under thesymbol “MTEX.” As of February 28, 2017, we had an aggregate of 2,700,858 shares of our common stock outstanding and the closing price on such date was$18.80. 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 31,2016 and 2015:2016:Low HighFirst Quarter$16.85 $24.33Second Quarter$18.58 $22.88Third Quarter$16.64 $20.59Fourth Quarter$16.25 $21.85 2015:Low HighFirst Quarter$17.12 $28.49Second Quarter$18.00 $21.04Third Quarter$16.91 $21.00Fourth Quarter$18.55 $28.06Holders. As of February 28, 2017, there were 1,498 shareholders of record.Dividend. During the year ended December 31, 2016, the Company declared and paid dividends on its outstanding common stockamounting to an aggregate of $0.7 million. No dividends were paid in 2015.Recent Sales of Unregistered Securities. None.Uses of Proceeds from Registered Securities. None.Issuer Purchases of Equity Securities.Issuer Purchases of Equity SecuritiesDuring the three-month period ended December 31, 2016, we repurchased the following shares of our common stock:Period Total numberof sharespurchased Averagepricepaid per share Total number of sharespurchased as part ofpublicly announcedprograms(a) Dollar value ofshares that may yet be purchased (b)(in thousands)October 1, 2016 - October 31, 2016 — $— — $19,841November 1, 2016 - November 30, 2016 2,828 $16.72 2,828 19,794December 1, 2016 - December 31, 2016 3,860 $17.07 3,860 19,729Total 6,688 6,688 (a)We have an ongoing authorization, originally approved by our Board of Directors on August 28, 2006, and subsequently reactivated by our Board of Directors in August of2016, to repurchase up to $0.5 million (of the original $20.0 million authorization) in shares of our common stock in the open market.(b)Remaining value of the original $20.0 million approved on August 28, 2006 (the “August 2006 Plan”).Item 6.Selected Financial DataNot applicable for a Smaller Reporting Company36Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each ofthe two years ended December 31, 2016 and 2015. This discussion should be read in conjunction with “Item 15. – Consolidated Financial Statements andrelated notes,” beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, allfinancial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all ofour subsidiaries on a consolidated basis. Refer to the Non-GAAP Financial Measure section herein for a description of how Constant dollar (“Constantdollar”) growth rate (a Non-GAAP financial metric) is determined.COMPANY OVERVIEWSince November 1993, we have continued to develop innovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management and fat loss products that are sold through a global network marketing system. We operate in three regions: (i) theAmericas (the United States, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic ofIreland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, theRepublic of Korea, Singapore, Taiwan, Hong Kong and China).We conduct our business as a single operating segment and primarily sell our products through a network of approximately 222,000 activeindependent associates and member positions held by individuals that had purchased our products and/or packs during the last 12 months, who we refer to ascurrent independent associates and members. New pack sales and positions in our network are leading indicators for the long-term success of our business.New associate or member positions are created in our network when our packs and products are purchased for the first time under a new account. We operateas a seller of nutritional supplements, topical and skin care and anti-aging products, and weight-management products through our network marketingdistribution channels operating in 25 countries and direct e-commerce retail in China. We review and analyze net sales by geographical location and bypacks and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as sellingprices and gross margins. Because we sell our products through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitmentof new and retention of current independent associates and members that occupy sales or purchasing positions in our network; entry into new markets andgrowth of existing markets; niche market development; new product introduction; and investment in our infrastructure. During the fourth quarter of 2016, wecommenced a non-direct selling business in China. Our subsidiary in China, Meitai, is operating as a traditional retailer under a cross-border e-commercemodel. Meitai cannot legally conduct a direct selling business in China until it acquires a direct selling license in China.Current Economic Conditions and Recent DevelopmentsOverall net sales remained the same at $180.3 million for both 2016 and 2015. Our operations outside of North America accounted forapproximately 61.1% and 59.3% of our consolidated net sales for 2016 and 2015, respectively.The net sales comparisons were affected by the launch of new products and promotions in all of our operating markets and the loyalty programduring 2016. These items affected net sales comparability as follows:•Sales from new products and promotions for 2016 were $11.1 million as compared to the same period in 2015.•In connection with our loyalty program, we recognize the dollar equivalent in revenue of loyalty points as the points are applied or forfeited.During 2016 we recognized $22.4 million in revenue and deferred $21.4 million in revenue, resulting in a net recognition of revenue of $1.0million. During 2015, we recognized $23.8 million in revenue and deferred $22.2 million in revenue, resulting in a net recognition of revenueof $1.6 million. During 2016, $0.6 million less in revenue was recognized in connection with our loyalty program as compared to 2015.Excluding the effects on net sales of the items listed above, net sales for 2016 would have decreased by $10.5 million as compared to 2015. During2016, fluctuations in foreign currency exchange rates had an overall $1.7 million unfavorable impact on our net sales.37Table of ContentsRESULTS OF OPERATIONSYear Ended December 31, 2016 compared to Year Ended December 31, 2015The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2016 and2015 (in thousands, except percentages). 2016 2015 Change TotalDollars % ofnet sales Totaldollars % ofnet sales Dollar PercentageNet sales$180,304 100.0 % $180,267 100.0 % $37 — %Cost of sales36,564 20.3 % 34,102 18.9 % 2,462 7.2 %Gross profit143,740 79.7 % 146,165 81.1 % (2,425) (1.7)% Operating expenses: Commissions and incentives74,215 41.2 % 72,956 40.5 % 1,259 1.7 %Selling and administrative expenses37,180 20.6 % 34,458 19.1 % 2,722 7.9 %Depreciation and amortization1,898 1.0 % 1,793 1.0 % 105 5.9 %Other operating costs29,749 16.5 % 24,814 13.8 % 4,935 19.9 %Total operating expenses143,042 79.3 % 134,021 74.3 % 9,021 6.7 %Income from operations698 0.4 % 12,144 6.7 % (11,446) (94.3)%Interest income174 0.1 % 210 0.1 % (36) (17.1)%Other expense, net(1,827) (1.0)% (4,155) (2.3)% 2,328 (56.0)%Income (Loss) before income taxes(955) (0.5)% 8,199 4.5 % (9,154) (111.6)%Income tax benefit (provision)369 0.2 % (2,360) (1.3)% 2,729 (115.6)%Net income (loss)$(586) (0.3)% $5,839 3.2 % $(6,425) (110.0)%Non-GAAP Financial MeasuresTo supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), wedisclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, includingchanges in: Net Sales, Deferred Revenue, Gross Profit, and Income from Operations. We refer to these adjusted financial measures as Constant dollar items,which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. To exclude the impact of changesdue to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate, which is theprior year’s rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates. 2016 2015 Constant $ Change GAAPMeasure:Total $ Non-GAAPMeasure:Constant $ GAAPMeasure:Total $ Dollar PercentNet sales180.3 182.0 $180.3 1.7 0.9 %Product148.6 149.9 143.1 6.8 4.8 %Pack26.7 27.1 31.7 (4.6) (14.5)%Other5.0 5.1 5.5 (0.4) (7.3)%Gross profit143.7 144.8 146.2 (1.4) (1.0)%Income from operations0.7 0.6 12.1 (11.5) (95.0)%38Table of ContentsNet Sales in Dollars and as a Percentage of Consolidated Net SalesConsolidated net sales by region for the years ended December 31, 2016 and 2015 were as follows (in millions, except percentages): 2016 2015Americas$70.2 38.9% $73.3 40.7%Asia/Pacific96.2 53.4% 91.4 50.7%EMEA13.9 7.7% 15.6 8.6%Total$180.3 100.0% $180.3 100.0%Net SalesFor the year ended December 31, 2016, our operations outside of North America accounted for approximately 61.1% of our consolidated net sales,whereas in the same period in 2015, our operations outside of North America accounted for approximately 59.3% of our consolidated net sales.Consolidated net sales remained the same at $180.3 million for the years ended December 31, 2016 and December 31, 2015. Sales for the Americasdecreased by $3.1 million, or 4.2%, to $70.2 million as compared to $73.3 million for the same period in 2015. Asia/Pacific sales increased by $4.8 million,or 5.3%, to $96.2 million as compared to $91.4 million for the same period in 2015. EMEA sales decreased by $1.7 million, or 10.9%, to $13.9 million ascompared to $15.6 million for the same period in 2015.During 2016, fluctuations in foreign currency exchange rates had an overall unfavorable impact on our net sales. In Constant Dollars net sales for theyear ending December 31, 2016 grew by $1.7 million, compared to 2015. The net sales impact is calculated as the difference between (1) the current period’snet 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 endedDecember 31, 2015.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.39Table of ContentsOur sales mix for the years ended December 31, was as follows (in millions, except percentages): Change 2016 2015 Dollar PercentageConsolidated product sales$148.6 $143.1 $5.5 3.8 %Consolidated pack sales26.7 31.7 (5.0) (15.8)%Consolidated other, including freight5.0 5.5 (0.5) (9.1)%Total consolidated net sales$180.3 $180.3 $— — %Product SalesOur product sales are made to independent associates at published wholesale prices. We also sell our products to members at discounted publishedretail prices. Product sales for the year ended December 31, 2016 increased by $5.5 million, or 3.8%, to $148.6 million, as compared to $143.1 million for thesame period in 2015. The increase in product sales was primarily due to an increase in average order size. The average order value in 2016 was $166, ascompared to $155 for the same period in 2015. The number of orders processed during the year ended December 31, 2016 decreased by 3.4% as compared tothe same period in 2015. Pack SalesPacks may be purchased by our independent associates who wish to build a Mannatech business. These packs contain product that is discountedfrom both the published retail and associate price. There are several pack options available to our independent associates. In certain markets, pack sales arecompleted during the final stages of the registration process and can provide new independent associates with valuable training and promotional materials, aswell as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building independent associates can alsopurchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and eligibility for additionalcommissions and incentives.The dollar amount of pack sales associated with new and continuing independent associate positions held by individuals in our network was asfollows, for the years ended December 31 ( in millions, except percentages): Change 2016 2015 Dollar PercentageNew$11.8 $8.7 $3.1 35.6 %Continuing14.9 23.0 (8.1) (35.2)%Total$26.7 $31.7 $(5.0) (15.8)%Total pack sales for the year ended December 31, 2016 decreased by $5.0 million, or 15.8%, to $26.7 million , as compared to $31.7 million for thesame period in 2015 as the number of packs sold decreased by 7.2%. Average pack value for the year ended December 31, 2016 was $213, as compared to$235 for the same period in 2015.The approximate number of active new and continuing independent associate positions and member positions held by individuals in our networkassociated with the purchase of our packs or products during the twelve months ended December 31 was as follows: 20162015New103,00046.4%96,00043.8%Continuing119,00053.6%123,00056.2%Total222,000100.0%219,000100.0%40Table of ContentsPack sales correlate to new associate positions held by individuals in our network when a starter pack is purchased and to continuing associatepositions held by individuals in our network when an upgrade or renewal pack is purchased. However, there is no direct correlation between product salesand the number of new and continuing associate positions and member positions held by individuals in our network because associates and members utilizeproducts at different volumes.During 2016 and 2015, 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;•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 SalesOther sales consisted of: (i) freight revenue charged to our independent associates and members; (ii) sales of promotional materials; (iii) monthly feescollected for the Success Tracker™ customized electronic business-building and educational materials, databases and applications; (iv) training and eventregistration fees; and (v) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business managementtools support our independent associates, which in turn helps stimulate product sales.For the year ended December 31, 2016, other sales decreased by $0.5 million, or 9.1%, to $5.0 million, as compared to $5.5 million for the sameperiod in 2015. The decrease was primarily due to a decrease in freight revenues partially offset by an increase in event fees.Gross ProfitFor the year ended December 31, 2016, gross profit decreased by $2.4 million, or 1.7%, to $143.7 million, as compared to $146.2 million for thesame period in 2015. The decline in gross profit percentage was primarily due to promotional discounting, increases in transportation costs, and negativeeffects of foreign exchange. Gross profit as a percentage of net sales was 79.7% and 81.1% for 2016 and 2015, respectively.Commission and IncentivesCommission expenses increased for the year ended December 31, 2016, by 0.4%, or $0.3 million to $70.5 million, as compared to $70.2 million forthe same period in 2015. Commissions as a percentage of net sales were 39.1% for the year ending December 31, 2016 and 39.0% for the same period in theprior year.Incentive costs increased for the year ended December 31, 2016 by 37%, or $1 million, to $3.7 million, as compared to $2.7 million for the sameperiod in 2015. The costs of incentives, as a percentage of net sales increased to 2.1% for the year ended December 31, 2016, as compared to 1.5% for thesame period in 2015. These increases are attributed to the United States and South Korea, where more associates qualified for incentives.Selling and Administrative ExpensesSelling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation andbenefits for employees, temporary and contract labor and marketing-related expenses, such as the costs to introduce our new brand, and the costs related tohosting our corporate-sponsored events.41Table of ContentsFor the year ended December 31, 2016, overall selling and administrative expenses increased by $2.7 million, or 7.9%, to $37.2 million, ascompared to $34.5 million for the same period in 2015. The increase in selling and administrative expenses consisted primarily of a $0.5 million increase inwarehouse costs, a $0.5 million increase in contract labor costs, a $0.4 million increase in marketing costs, and a $1.2 million increase in payroll related costsas some non-recurring reductions in payroll costs were offset by the cost of additional employees.Other Operating CostsOther operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees,utilities, bad debt, and other miscellaneous operating expenses. Changes in other operating costs are associated with the changes in our net sales.For the year ended December 31, 2016, other operating costs increased by $4.9 million, or 19.9%, to $29.7 million, as compared to $24.8 million forthe same period in 2015. For the year ended December 31, 2016, other operating costs, as a percentage of net sales, were 16.5%, as compared to 13.8% for thesame period in 2015. The increase in other operating costs was primarily due to a $2.5 million increase in legal and consulting fees as we continue to exploreexpansion in new markets, transform our supply chain and defend our patents, a $1.2 million increase in travel and entertainment costs attributed to eventsfor our independent associates, travel to Columbia for market launch support, and travel to China for the new market launch that occurred in the fourthquarter, a $1.0 million increase in miscellaneous administrative costs such as research and development, accounting fees and bad debt, and a $0.4 millionabandonment charge of internally developed back office software, partially offset by a $0.2 million decrease in office expenses.Depreciation and Amortization ExpenseFor the year ended December 31, 2016, depreciation and amortization expense was $1.9 million, as compared to $1.8 million for the same period in2015.Other Expense, netFor the year ending December 31, 2016 and 2015, other income (expense), net was ($1.7) million and ($3.9) million, respectively. During 2016, theother income (expense) included $0.2 million of interest income and ($1.8) million of foreign exchange loss. During 2015, the other income (expense)included $0.2 million of interest income and ($4.2) million of foreign exchange loss.42Table of ContentsProvision for Income TaxesProvision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates byjurisdiction are as follows, for the years ended December 31:Country2016 2015Australia30.0% 30.0%Canada26.5% 26.5%Denmark22.0% 23.5%Japan35.4% 37.1%Mexico30.0% 30.0%Norway25.0% 27.0%Republic of Korea22.0% 22.0%Singapore17.0% 17.0%South Africa28.0% 28.0%Sweden22.0% 22.0%Switzerland16.2% 16.2%Taiwan17.0% 17.0%United Kingdom20.0% 20.0%United States35.0% 35.0%Cyprus12.5% 12.5%Hong Kong16.5% 16.5%Ukraine(1)18.0% 18.0%Gibraltar10.0% 10.0%Colombia34.0% 34.0%China(2)25.0% —%Russia(3)20.0% —%(1)On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity, Mannatech Ukraine LLC.(2)On February 24, 2016, the Company established a legal entity in China called Meitai Daily Necessity & Health Products Co., Ltd.(3)On August 1, 2016, the Company established a legal entity in Russia called Mannatech RUS Ltd., but currently does not operate in Russia Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income taxcredits 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 theUnited States.We use the recognition and measurement provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuationallowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effectof such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as allof 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.43Table of ContentsAs of December 31, 2016 and 2015, we maintained or decreased 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. The U.S. valuationallowance increased due to the carryover of foreign tax credits that we do not anticipate to utilize in future years.Country2016 2015Colombia$0.3 $—Mexico2.4 2.5Sweden0.1 0.1Switzerland0.1 1.0Taiwan1.3 1.2Ukraine0.1 0.1United States4.1 4.0Other Jurisdictions0.1 0.1Total$8.5 $9.0The dollar amount of the provisions for income taxes is directly related to our profitability and changes in the taxable income among countries. Forthe years ended December 31, 2016 and 2015, our effective tax rate was 38.7% and 28.9%, respectively. For 2016, the Company had a tax benefit due to lossbefore income tax. Items decreasing the effective income tax rate included the favorable rate difference from foreign jurisdictions, return to provisionadjustment, release of value allowances with respect to Switzerland and certain tax reserve items were removed due to expiration of applicable statute oflimitations. Items increasing the effective income tax rate included foreign exchange losses and “Subpart F income” resulting from controlled foreigncorporation operations. For 2015, the effective tax rate was less than what would have been expected if the federal statutory rate was applied to income beforetaxes. Items decreasing the effective income tax rate included the lower statutory tax rates in foreign jurisdictions compared to the U.S. and the mix of foreignincome and U.S. income. In addition, the rate decreased for an overall reduction in the valuation allowances associated with certain deferred tax assets.SEASONALITYWe believe the impact of seasonality on our consolidated results of operations is minimal. We have experienced and believe we will continue toexperience 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 reliedupon 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 ourhistorical patterns. The market price of our common stock may also be adversely affected by the above factors.44Table of ContentsLIQUIDITY AND CAPITAL RESOURCESCash and Cash EquivalentsAs of December 31, 2016, our cash and cash equivalents decreased by 10.3%, or $3.3 million, to $28.7 million from $32.0 million as ofDecember 31, 2015. The Company is required to restrict cash for direct selling insurance premiums and credit card sales in the Republic of Korea. The currentportion of restricted cash remained the same at $1.5 million at both December 31, 2016 and 2015. Fluctuations in currency rates produced an increase of $1.5million in cash and cash equivalents in 2016 as compared to an increase of $1.4 million in 2015.Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, periodic cashdividends and international expansion. We fund our business objectives, operations, and expansion of our operations through net cash flows from operationsrather than incurring long-term debt.Working CapitalWorking capital represents total current assets less total current liabilities. At December 31, 2016, our working capital decreased by $2.7 million, or11.5%, to $20.8 million from $23.5 million at December 31, 2015. The decrease in working capital is primarily due to decreases in cash and deferred taxassets as well as increases in accounts payable, taxes payable, and commissions and incentives payable. This was partially offset by a decrease in accruedexpenses and deferred revenue as well as increases in income tax receivable, inventories, and prepaid expenses. Deferred revenue decreased during 2016 dueto the loyalty program (see Note 1 to our Consolidated Financial Statements, Organization and Summary of Significant Accounting Policies).Net Cash FlowsOur net consolidated cash flows consisted of the following, for the years ended December 31 (in millions):Provided by / (used in):2016 2015Operating activities$— $4.4Investing activities$(2.3) $(2.0)Financing activities$(2.5) $0.1Operating ActivitiesCash provided by operating activities decreased by $4.4 million for the year ended December 31, 2016 compared to the same period in 2015 as aresult of increases in operating expenditures such as our new brand introduction, exploring expansion into new markets, support for new market launches,and inventory purchases.Investing ActivitiesFor the year ended December 31, 2016, our investing activities used cash of $2.3 million compared to cash used of $2.0 million for the same periodof 2015. During the year ended December 31, 2016, we invested approximately $1.6 million in back-office software projects, approximately $0.6 million inleasehold improvements in various international offices and training centers, and approximately $0.1 in office furniture and equipment. During the yearended December 31, 2015, we invested $1.3 million in computer hardware and software and $0.7 million for leasehold improvements in various internationaloffices and training centers.Financing ActivitiesFor the year ended December 31, 2016, we used $1.6 million in the repayment of capital lease obligations, $0.7 million in the payment of dividendsto shareholders, and $0.3 million in the repurchase of common stock. For the year ended December 31, 2015, we used cash of $1.5 million to repay capitallease obligations and received $1.6 million in funding from a capital financing agreement which matures in December of 2018 related to our investment incomputer hardware and software.45Table of ContentsGeneral Liquidity and Cash FlowsShort Term LiquidityWe believe our existing liquidity and cash flows from operations are adequate to fund our normal expected future business operations for the next12 months. As our primary source of liquidity is our cash flows from operations, this will be dependent on our ability to maintain and/or continue to improverevenue as compared to our 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. As ofDecember 31, 2016 and 2015, cash and cash equivalents held in bank accounts in foreign countries totaled $27.5 million and $31.3 million, respectively.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 topredict whether we will incur any liability, or to estimate the ranges of damages, if any, in connection with these matters. Adverse outcomes on theseuncertainties may lead to substantial liability or enforcement actions that could adversely affect our cash position. For more information, see Note 8 IncomeTaxes and Note 13 Litigation to our Consolidated Financial Statements.Long Term LiquidityWe believe our cash flows from operations should be adequate to fund our normal expected future business operations and possible internationalexpansion costs for the long term. As our primary source of liquidity is from our cash flows from operations, this will be dependent on our ability to maintainand and/or improve revenue as compared to operational expenses.However, if our existing capital resources or cash flows become insufficient to meet anticipated business plans and existing capital requirements, wemay 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 thecontinued listing of our stock. We continuously monitor our compliance with the Nasdaq continued listing rules.CONTRACTUAL OBLIGATIONS The following summarizes our future commitments and obligations associated with various agreements and contracts as of December 31, 2016, forthe years ending December 31 (in thousands): 2017 2018 2019 2020 2021 Thereafter TotalCapital lease obligations$376 $206 $52 $12 $— $— $646Purchase obligations (1)(2)4,080 5,100 5,100 4,675 — — 18,955Operating leases2,689 1,573 784 119 3 — 5,168Note payable and other financingarrangements836 579 — — — — 1,415Employment agreements962 — — — — — 962Royalty agreement59 59 59 59 6 — 242Tax liability (3)576 — — — — 157 733Other obligations (4)417 22 135 84 36 960 1,654Total commitments andobligations$9,995 $7,539 $6,130 $4,949 $45 $1,117 $29,775(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 Companythat specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of thetransaction.(2)Excludes approximately $8.9 million of finished product purchase orders that may be canceled or with delivery dates that have changed as of December 31, 2016.(3)Represents the tax liability associated with uncertain tax positions, see Note 8 to our Consolidated Financial Statements, Income Taxes to our consolidated financial statements.(4)Other obligations are composed of pension obligations related to the Company's international operations (approximately $1.1 million) and lease restoration obligations(approximately $0.6 million).46Table of ContentsWe have maintained purchase commitments with certain raw material suppliers to purchase minimum quantities and to ensure exclusivity of our rawmaterials and the proprietary nature of our products. Currently, we have one supply agreement that requires minimum purchase commitments. We alsomaintain 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 purchasesof any manufacturing facilities; however, management from time to time explores the possibility of the benefits of purchasing a raw material manufacturingfacility to help control costs of our raw materials and help ensure quality control standards.OFF-BALANCE SHEET ARRANGEMENTSWe do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements.MARKET RISKSPlease see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about ourMarket Risks.CRITICAL ACCOUNTING POLICIES AND ESTIMATESOur 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 ourfinancial statements, the reported amounts of revenues and expenses during the reporting period, and the related disclosures of contingent assets andliabilities. We use estimates throughout our financial statements, which are influenced by management’s judgment and uncertainties. Our estimates are basedon historical trends, industry standards, and various other assumptions that we believe are applicable and reasonable under the circumstances at the time theconsolidated financial statements are prepared. Our Audit Committee reviews our critical accounting policies and estimates. We continually evaluate andreview our policies related to the portrayal of our consolidated financial position and consolidated results of operations that require the application ofsignificant judgment by our management. We also analyze the need for certain estimates, including the need for such items as allowance for doubtfulaccounts, inventory reserves, long-lived fixed assets and capitalization of internal-use software development costs, reserve for uncertain income tax positionsand tax valuation allowances, revenue recognition, sales returns, and deferred revenues, accounting for stock-based compensation, and contingencies andlitigation. Historically, actual results have not materially deviated from our estimates. However, we caution readers that actual results could differ from ourestimates and assumptions applied in the preparation of our consolidated financial statements. If circumstances change relating to the various assumptions orconditions used in our estimates, we could experience an adverse effect on our financial position, results of operations, and cash flows. We have identified thefollowing applicable critical accounting policies and estimates as of December 31, 2016:Inventory ReservesInventory consists of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs thatapproximate average costs) or market. We record the amounts charged by the vendors as the costs of inventory. Typically, the net realizable value of ourinventory is higher than the aggregate cost. Determination of net realizable value can be complex and, therefore, requires a high degree of judgment. In orderfor management to make the appropriate determination of net realizable value, the following items are considered: inventory turnover statistics, currentselling prices, seasonality factors, consumer demand, regulatory changes, competitive pricing, and performance of similar products. If we determine thecarrying 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 determinationof obsolescence is based on assumptions about the demand for our products, product expiration dates, estimated future sales, and general future plans. Wemonitor actual sales compared to original projections, and if actual sales are less favorable than those originally projected by us, we record an additionalinventory reserve or write-down. Historically, our estimates have been close to our actual reported amounts. However, if our estimates regarding inventoryobsolescence are inaccurate or consumer demand for our products changes in an unforeseen manner, we may be exposed to additional material losses or gainsin excess of our established estimated inventory reserves. At December 31, 2016 and 2015, our inventory reserves were $0.4 million and $1.3 million,respectively.47Table of ContentsLong Lived Fixed Assets and Capitalization of Software Development CostsIn 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 depreciationcomputed using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the remaininglease terms or the estimated useful lives of the improvements. Expenditures for maintenance and repairs are charged to operations as incurred. If a fixed assetis 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 resultinggain 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 assetsmay not be recoverable, such as plans to dispose of an asset before the end of its previously estimated useful life. Our impairment review includes acomparison 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 theasset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carryingamount exceeds the fair value. The fair value is determined by calculating the discounted expected future cash flows using an estimated risk-free rate ofinterest. Any identified impairment losses are recorded in the period in which the impairment occurs. The carrying value of the fixed asset is adjusted to thenew carrying value and any subsequent increases in fair value of the fixed asset are not recorded. In addition, if we determine the estimated remaining usefullife of the asset should be reduced from our original estimate, the periodic depreciation expense is adjusted prospectively, based on the new remaining usefullife of the fixed asset.The impairment calculation requires us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives, and discountrates. If actual results are not consistent with our estimates and assumptions, we may be exposed to an additional impairment charge, which could be materialto our results of operations. In addition, if accounting standards change, or if fixed assets become obsolete, we may be required to write off any unamortizedcosts of fixed assets; or if estimated useful lives change, we would be required to accelerate depreciation or amortization periods and recognize additionaldepreciation expense in our consolidated statement of operations.On August 29, 2016, we received information indicating that a portion of the capitalized costs related to an item included in our computer hardwareand software asset group would not be completed due to problems with the vendor in completing the code. We evaluated the project and determined a chargewas required due to the abandonment of the project. For the year ending December 31, 2016 we recorded $0.4 million in operating expenses that representedwork that was performed, but which no longer has any value to the Company or any possibility of affecting future cash inflows.Historically, our estimates and assumptions related to the carrying value and the estimated useful lives of our fixed assets have not materiallydeviated from actual results. As of December 31, 2016, the estimated useful lives and net carrying values of fixed assets are as follows: Estimated usefullife Net carrying valueat December 31,2016Office furniture and equipment5 to 7 years$0.4 millionComputer hardware and software3 to 5 years2.0 millionAutomobiles3 to 5 years— millionLeasehold improvements(1)2 to 10 years1.2 millionTotal net carrying value at December 31, 2016 $3.6 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 theircarrying 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 onmanagement’s analysis, no impairment existed during the years ended December 31, 2016 and 2015.48Table of ContentsUncertain Income Tax Positions and Tax Valuation AllowancesAs of December 31, 2016, we recorded $0.2 million in other long-term liabilities and $0.6 million in taxes payable on our consolidated balancesheet related to uncertain income tax positions. As required by FASB ASC Topic 740, Income Taxes, we use judgments and make estimates and assumptionsrelated to evaluating the probability of uncertain income tax positions. We base our estimates and assumptions on the potential liability related to anassessment 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 frommultiple domestic and foreign tax authorities related to income tax and other forms of taxation. These audits examine our tax positions, timing of income anddeductions, and allocation procedures across multiple jurisdictions. Depending on the nature of the tax issue, we could be subject to audit over several years.Therefore, our estimated reserve balances and liability related to uncertain income tax positions may exist for multiple years before the applicable statute oflimitations expires or before an issue is resolved by the taxing authority. Additionally, we may be requested to extend the statute of limitations for tax yearsunder audit. It is reasonably possible the tax jurisdiction may request that the statute of limitations be extended, which may cause the classification betweencurrent and long-term to change. We believe our tax liabilities related to uncertain tax positions are based upon reasonable judgment and estimates; however,if actual results materially differ, our effective income tax rate and cash flows could be affected in the period of discovery or resolution. There are ongoingincome tax audits in various international jurisdictions that we believe are not material to our financial statements.We also review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and recorda 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 futurebenefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, futuremanagement plans, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2016, we maintained avaluation allowance for deferred tax assets arising from our operations of $8.4 million because they did not meet the “more likely than not” criteria as definedby the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as of December 31, 2016, we had deferred tax assets,after valuation allowance, totaling $5.3 million, which may not be realized if our assumptions and estimates change, which would affect our effective incometax rate and cash flows in the period of discovery or resolutionRevenue Recognition and Deferred CommissionsOur revenue is derived from sales of individual products, sales of starter and renewal packs, and shipping fees. Substantially all of our product andpack sales are to associates at published wholesale prices and to members at discounted published retail prices. We record revenue net of any sales taxes andrecord a reserve for expected sales returns based on historical experience.49Table of ContentsWe recognize revenue from shipped packs and products upon receipt by the customer. Corporate-sponsored event revenue is recognized when theevent is held. We defer certain components of revenue. At December 31, 2016 and December 31, 2015, deferred revenue was $8.2 million and $8.7 million,respectively. During the third quarter of 2013, we started a loyalty program through which customers earn loyalty points from qualified automatic orders,which can be applied to future purchases. We defer the dollar equivalent in revenue of these points until the points are applied or forfeited, which includes anestimate of the percentage of the unvested loyalty points that are expected to be forfeited. During the third quarter 2014, we modified the program to allowloyalty points to vest more quickly. The deferred revenue associated with the loyalty program at December 31, 2016 and December 31, 2015 was $7.0million and $8.1 million, respectively. Deferred revenue consisted primarily of: (i) sales of packs and products shipped but not received by the customers bythe end of the respective period; (ii) revenue from the loyalty program; and (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event. In total current assets, we defer commissions on (i) the sales of packs and products shipped but not received by the customers by the end ofthe respective period and (ii) the loyalty program. Deferred commissions were $3.2 million and $3.4 million at December 31, 2016 and December 31, 2015,respectively.Loyalty program(in thousands)Loyalty deferred revenue as of January 1, 2015$9,703Loyalty points forfeited(8,801)Loyalty points used(15,077)Loyalty points vested20,403Loyalty points unvested1,845Loyalty deferred revenue as of December 31, 2015$8,073Loyalty deferred revenue as of January 1, 2016$8,073Loyalty points forfeited(6,963)Loyalty points used(15,451)Loyalty points vested20,085Loyalty points unvested1,289Loyalty deferred revenue as of December 31, 2016$7,033Product Return PolicyWe stand behind our packs and products and believe we offer a reasonable, industry-standard product return policy to all of our customers. We donot resell returned products. Refunds are not processed until proper approval is obtained. All refunds must be processed and returned in the same form ofpayment that was originally used in the sale. We have specific product return guidelines for each country in which we operate. However, we allow ourassociates and members to exchange products as long as the products are unopened and in good condition. Our return policies for our retail customers andour 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 associate who sold theproduct and receive a full cash refund from the associate for the first 180 days following the product’s purchase in the United States and Canada,and for the first 90 days following the product’s purchase in our remaining countries. The associate may then return or exchange the productbased on the associate position product return policy.•Associate and Member Product Return Policy. This policy allows the associate or member to return an order within one year of the purchasedate upon terminating his/her account. If an associate or member returns a product unopened and in good condition, he/she may receive a fullrefund minus a 10% restocking fee. We may also allow the associate or member to receive a full satisfaction guarantee refund, excludingpromotional materials, if they have tried the product and are not satisfied for any reason. This satisfaction guarantee refund applies in the UnitedStates and Canada, only for the first 180 days following the product’s purchase, and applies in our remaining countries for the first 90 daysfollowing the product’s purchase; however, any commissions earned by an associate will be deducted from the refund. If we discover abuse ofthe refund policy, we have the right to terminate the associate’s or member’s account.50Table of ContentsWe estimate a sales return reserve for expected sales refunds based on historical experience over a rolling six-month period. If actual results differfrom our estimated sales return reserve due to various factors, the amount of revenue recorded each period could be materially affected. Historically, salesreturns 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 theoriginal sale. Sales returns have averaged 1.5% or less of our gross sales. For the year ended December 31, 2016 our sales return reserve was composed of thefollowing (in thousands): December 31, 2016Sales reserve as of January 1, 2016$147Provision related to sales made in current period1,326Adjustment related to sales made in prior periods8Actual returns or credits related to current period(1,207)Actual returns or credits related to prior periods(145)Sales reserve as of December 31, 2016$129Accounting for Stock-Based CompensationWe grant stock options to our employees, board members, and consultants. At the date of grant, we determine the fair value of a stock option awardand recognize compensation expense over the requisite service period, or the vesting period of such stock option award, which is two or three years. The fairvalue of the stock option award is calculated using the Black-Scholes option-pricing model (the “calculated fair value”). The Black-Scholes option-pricingmodel 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, 2016, our assumptions and estimates used for the calculated fair value ofstock options granted in 2016 were as follows:2016 GrantsJune DecemberEstimated fair value per share of options granted:$12.18 $7.78Assumptions: Dividend yield—% 2.9%Risk-free rate of return1.1% 1.7%Common stock price volatility73.5% 67.4%Expected average life of stock options (in years)4.5 4.5Historically, our estimates and underlying assumptions have not materially deviated from our actual reported results and rates. However, we baseassumptions we use on our best estimates, which involves inherent uncertainties based on market conditions that are outside of our control. If actual resultsare not consistent with the assumptions we use, the stock-based compensation expense reported in our consolidated financial statements may not berepresentative of the actual economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our estimatedforfeitures, we may be required to adjust our consolidated financial statements in future periods. As of December 31, 2016, using our current assumptions andestimates, we anticipate recognizing $0.4 million in gross compensation expense through 2019 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 ofsuch stock options in our consolidated statement of operations. As of December 31, 2016, we had 80,934 shares available for grant in the future.Contingencies and LitigationEach quarter, we evaluate the need to establish a reserve for any legal claims or assessments. We base our evaluation on our best estimates of thepotential liability in such matters. The legal reserve includes an estimated amount for any damages and the probability of losing any threatened legal claimsor assessments. The legal reserve is developed in consultation with our general and outside counsel and is based upon a combination of litigation andsettlement 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 adverse51Table of Contentsoutcome 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 PRONOUNCEMENTSIn May 2014, the FASB issued Accounting Standards Update “ASU” 2014-09, Revenue from Contracts with Customers. This new standard requirescompanies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a companyexpects to be entitled in exchange for those goods or services. Under the new standard, revenue is recognized when a customer obtains control of a good orservice. The standard allows for two transition methods - entities can either apply the new standard (i) retrospectively to each prior reporting period presented,or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. In July 2015, the FASB issuedASU 2015-14, Revenue from Contracts with Customers, which defers the effective date by one year to December 15, 2017 for fiscal years, and interim periodswithin those fiscal years, beginning after that date. In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers, Principal versusAgent Considerations (Reporting Revenue versus Net), in April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers, identifyingPerformance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-ScopeImprovements and Practical Expedients, which provide additional clarification on certain topics addressed in ASU 2014-09. ASU 2016-08, ASU 2016-10,and ASU 2016-12 follow the same implementation guidelines as ASU 2014-09 and ASU 2015-14. An implementation team has gained an understanding ofthe standard’s revenue recognition model, is completing the review and documentation of our contracts, and is analyzing whether enhancements are neededto our business and accounting systems.In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). Under ASU 2016-02, an entity will be required torecognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specificaccounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitativeinformation about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising fromleases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods withinthat reporting period, and requires a modified retrospective adoption, with early adoption permitted. We are in the process of evaluating the impact theamendment will have on our Consolidated Financial Statements.In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting, which is intended to simplify the accounting for share-based compensation. The area for simplification in ASU 2016-09 involves several aspectsof the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities. Theupdate is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Management is unable to estimatethe impact of this update since the amount of excess benefits and deficiencies are dependent on our stock price at the time a stock award vests or is exercised.See Note 2 to our Consolidated Financial Statements for further information on recent accounting pronouncements.52Table of ContentsItem 7A.Quantitative and Qualitative Disclosures About Market RiskWe do not engage in trading market risk sensitive instruments and do not purchase investments as hedges or for purposes “other than trading” thatare likely to expose us to certain types of market risk, including interest rate, commodity price, or equity price risk. Although we have investments, webelieve 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 futurescontracts, 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. Becausethe change in value of the United States dollar measured against foreign currency may affect our consolidated financial results, changes in foreign currencyexchange rates could positively or negatively affect our results as expressed in the United States dollars. For example, when the United States dollarstrengthens against foreign currencies in which our products are sold or weakens against foreign currencies in which we may incur costs, our consolidated netsales or related costs and expenses could be adversely affected. We translate our revenues and expenses in foreign markets using an average rate. We believeinflation has not had a material impact on our consolidated operations or profitability.We maintain policies, procedures, and internal processes in an effort to help monitor any significant market risks and we do not use any financialinstruments to manage our exposure to such risks. We assess the anticipated foreign currency working capital requirements of our foreign operations andmaintain 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, suchfluctuations may have on our future business, product pricing, operating expenses, and on our consolidated financial position, results of operations, or cashflows. However, to combat such market risk, we closely monitor our exposure to currency fluctuations. The regions and countries in which we currently haveexposure to foreign currency exchange rate risk include (i) North America/South America (Canada, Colombia and Mexico); (ii) EMEA (Austria, the CzechRepublic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, South Africa, Spain, Sweden, Switzerland and the UnitedKingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong and China). 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 asof and for the year ended December 31, 2016 were as follows: Year ended December 31, 2016 As ofDecember 31,2016Country (foreign currency name)Low High Average SpotAustralia (Australian Dollar)0.68691 0.78026 0.74400 0.72277Canada (Canadian Dollar)0.68483 0.79791 0.75527 0.74255China (Renminbi)0.14159 0.15509 0.15062 0.14394Columbia (Peso)0.000290.000360.000330.00033Czech Republic (Koruna)0.03847 0.04271 0.04097 0.03902Denmark (Kroner)0.13978 0.15513 0.14871 0.14175Hong Kong (Hong Kong Dollar)0.12785 0.12903 0.12884 0.12896Japan (Yen)0.00825 0.00999 0.00922 0.00857Mexico (Peso)0.04803 0.05824 0.05370 0.04837New Zealand (New Zealand Dollar)0.63880 0.74437 0.69740 0.69586Norway (Krone)0.11191 0.12547 0.11921 0.11604Republic of Korea (Won)0.00081 0.00092 0.00086 0.00083Singapore (Singapore Dollar)0.68942 0.74766 0.72471 0.69159South Africa (Rand)0.05949 0.07523 0.06827 0.07327Sweden (Krona)0.10651 0.12544 0.11708 0.11008Switzerland (Franc)0.97225 1.05040 1.01567 0.98148Taiwan (New Taiwan Dollar)0.02968 0.03218 0.03105 0.03094United Kingdom (British Pound)1.21688 1.48192 1.35635 1.23046Various countries (1) (Euro)1.03913 1.15428 1.10710 1.05373(1) Austria, Germany, the Netherlands, Estonia, Finland, the Republic of Ireland and Spain 53Table of ContentsItem 8.Financial Statements and Supplementary DataOur 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 DisclosureNone.Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principalfinancial officer), have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (asdefined 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 filedor submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms andinclude controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to ourmanagement, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.Changes in Internal Control over Financial ReportingDuring the quarter ended December 31, 2016, there were no changes in our internal control over our financial reporting that we believe materiallyaffected, or are reasonably likely to materially affect, our internal control over financial reporting.54Table of ContentsREPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a – 13(f) orRule 15d-15(f) under the Exchange Act) for the Company. Internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States ofAmerica. 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 reasonableassurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance thatunauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be preventedor detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that amisstatement 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 InternalControl — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this evaluation,management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016.55Table of ContentsItem 9B.Other Information None. PART IIIDocuments Incorporated by ReferenceThe 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 ourannual meeting to be filed with the SEC within 120 days after December 31, 2016.PART IVItem 15.Exhibits and Financial Statement Schedule(a) Documents filed as a part of the report:1. Consolidated Financial StatementsThe following financial statements and Report of Independent Registered Public Accounting Firm are filed as a part of this report on thepages indicated:Index to Consolidated Financial StatementsF-1Report of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2016 and 2015F-3Consolidated Statements of Operations for the years ended December 31, 2016 and 2015F-4Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015F-4Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016 and 2015F-5Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015F-6Notes to Consolidated Financial StatementsF-72. Financial Statement ScheduleThe 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 ListSee Index to Exhibits following our Consolidated Financial Statements contained in this Annual Report on Form 10-K.Item 16.Fixing America’s Surface Transportation (FAST) ActNot Applicable.56Table of ContentsSIGNATURESPursuant 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 onits behalf by the undersigned, thereunto duly authorized. MANNATECH, INCORPORATED Dated: March 14, 2017By:/s/ Alfredo Bala Alfredo Bala Chief Executive Officer (principal executive officer) Dated: March 14, 2017By:/s/ David A. Johnson David A. Johnson Chief Financial Officer (principal financial officer)57Table of ContentsPOWER OF ATTORNEYThe undersigned directors and officers of Mannatech, Incorporated hereby constitute and appoint Larry A. Jobe and David A. Johnson, and each ofthem, 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 fullpower 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 andother 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 causeto 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 registrantand in the capacities indicated:Signature Title Date /s/ Alfredo Bala Chief Executive Officer(principal executive officer) March 14, 2017Alfredo Bala /s/ David A. Johnson Chief Financial Officer(principal financial officer) March 14, 2017David A. Johnson /s/ J. Stanley Fredrick Chairman of the Board March 14, 2017J. Stanley Fredrick /s/ Robert A. Toth Director March 14, 2017Robert A. Toth /s/ Gerald E. Gilbert Director March 14, 2017Gerald E. Gilbert /s/ Kevin Andrew Robbins Director March 14, 2017Kevin Andrew Robbins /s/ Larry A. Jobe Director March 14, 2017Larry A. Jobe /s/ Linda K. Ferrell Director March 14, 2017Linda K. Ferrell /s/ Eric W. Schrier Director March 14, 2017Eric W. Schrier58Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2016 and 2015F-3Consolidated Statements of Operations for the years ended December 31, 2016 and 2015F-4Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015F-4Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016 and 2015F-5Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015F-6Notes to Consolidated Financial StatementsF-7F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersMannatech, IncorporatedCoppell, TexasWe have audited the accompanying consolidated balance sheets of Mannatech, Incorporated and Subsidiaries (“the Company”) as of December 31,2016 and 2015, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the twoyears in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is toexpress 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 standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included considerationof internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Companyat December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, inconformity with accounting principles generally accepted in the United States of America./s/ BDO USA, LLPDallas, TexasMarch 14, 2017F-2Table of ContentsMANNATECH, INCORPORATED AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands, except share information) December 31, 2016 December 31, 2015ASSETS Cash and cash equivalents$28,687 $31,994Restricted cash1,510 1,511Accounts receivable, net of allowance of $463 and $261 in 2016 and 2015, respectively298 369Income tax receivable1,587 4Inventories, net11,961 9,199Prepaid expenses and other current assets3,483 2,905Deferred commissions3,229 3,443Deferred tax assets, net7 460Total current assets50,762 49,885Property and equipment, net3,611 3,848Construction in progress1,012 839Long-term restricted cash6,429 6,586Other assets4,013 3,759Long-term deferred tax assets, net5,361 3,725Total assets$71,188 $68,642LIABILITIES AND SHAREHOLDERS’ EQUITY Current portion of capital leases$357 $447Accounts payable5,223 2,683Accrued expenses5,605 6,221Commissions and incentives payable8,799 6,818Taxes payable1,040 736Current deferred tax liability— 84Current notes payable801 713Deferred revenue8,156 8,677Total current liabilities29,981 26,379Capital leases, excluding current portion261 612Long-term deferred tax liabilities29 24Long-term notes payable567 1,069Other long-term liabilities1,465 1,994Total liabilities32,303 30,078Commitments 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, 2,758,275 shares issued and 2,688,790 sharesoutstanding as of December 31, 2016 and 2,773,972 shares issued and 2,682,078 shares outstanding as ofDecember 31, 2015— —Additional paid-in capital38,190 40,494Retained earnings7,331 8,589Accumulated other comprehensive income1,834 686Treasury stock, at average cost, 69,485 shares as of December 31, 2016 and 91,894 shares as of December 31,2015, respectively(8,470) (11,205)Total shareholders’ equity38,885 38,564Total liabilities and shareholders’ equity$71,188 $68,642See accompanying notes to consolidated financial statements.F-3Table of ContentsMANNATECH, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share information) For the years ended December 31, 2016 2015Net sales$180,304 $180,267Cost of sales36,564 34,102Gross profit143,740 146,165Operating expenses: Commissions and incentives74,215 72,956Selling and administrative expenses37,180 34,458Depreciation and amortization1,898 1,793Other operating costs29,749 24,814Total operating expenses143,042 134,021Income from operations698 12,144Interest income174 210Other expense, net(1,827) (4,155)Income (Loss) before income taxes(955) 8,199Income tax benefit (provision)369 (2,360)Net income (loss)$(586) $5,839Earnings per common share: Basic$(0.22) $2.18Diluted$(0.22) $2.14Weighted-average common shares outstanding: Basic2,688 2,680Diluted2,688 2,728CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) 2016 2015Net income (loss)$(586) $5,839Foreign currency translations gain1,176 815Pension obligations, net of tax provision of $15 and $11 in 2016 and 2015, respectively(28) (20)Comprehensive income$562 $6,634See accompanying notes to consolidated financial statements.F-4Table of ContentsMANNATECH, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(in thousands) Commonstock Additionalpaid incapital Retainedearnings Accumulatedothercomprehensiveincome Treasurystock Totalshareholders’equityBalance at December 31, 2014$— $40,672 $2,750 $(109) $(11,937) $31,376Charge related to stock-basedcompensation— 592 — — — 592Stock option exercises— (704) — — 732 28Tax effect from exercise of stock options— (66) — — — (66)Foreign currency translation— — — 815 — 815Pension obligations, net of tax of $11— — — (20) — (20)Net income— — 5,839 — — 5,839Balance at December 31, 2015$— $40,494 $8,589 $686 $(11,205) $38,564Charge related to stock-basedcompensation— 690 — — — 690Release of restricted stock— (1,881) — — 1,881 —Stock option exercises— (815) — — 854 39Tax effect from exercise of stock options— (24) — — — (24)Foreign currency translation— — — 1,176 — 1,176Pension obligations, net of tax of $15— — — (28) — (28)Repurchase of common stock— (274) — — — (274)Declared dividends— — (672) — — (672)Net loss— — (586) — — (586)Balance at December 31, 2016$— $38,190 $7,331 $1,834 $(8,470) $38,885See accompanying notes to consolidated financial statements.F-5Table of ContentsMANNATECH, INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) For the years ended December 31, 2016 2015CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)$(586) $5,839Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization1,898 1,793Provision for inventory losses343 480Provision for doubtful accounts562 369Loss on disposal of assets426 28Stock-based compensation expense690 592Deferred income taxes(1,290) 88Tax expense from exercise of stock options24 66Changes in operating assets and liabilities: Accounts receivable(495) (266)Income tax receivable(1,595) —Inventories(3,154) 605Prepaid expenses and other current assets(119) 462Other assets(115) 86Deferred commissions208 1,031Accounts payable2,553 (1,562)Accrued expenses and other liabilities(1,104) (392)Taxes payable233 (1,819)Commissions and incentives payable2,035 (969)Deferred revenue(534) (2,063)Change in restricted cash(3) 18Net cash provided by (used in) operating activities(23) 4,386CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment(2,286) (1,979)Proceeds from sale of assets1 —Net cash used in investing activities(2,285) (1,979)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock options exercised39 28Repurchase of common stock(274) —Payment of cash dividends(672) —Proceeds from note payable— 1,640Repayment of capital lease obligations(1,551) (1,526)Net cash provided by (used in) financing activities(2,458) 142Effect of currency exchange rate changes on cash and cash equivalents1,459 1,446Net increase (decrease) in cash and cash equivalents(3,307) 3,995Cash and cash equivalents at the beginning of the year31,994 27,999Cash and cash equivalents at the end of the year$28,687 $31,994SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid, net$1,778 $4,659Interest paid on capital leases$113 $89Assets acquired through financing arrangements$694 $670See accompanying notes to consolidated financial statements.F-6Table of ContentsMANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESMannatech, Incorporated (together with its subsidiaries, the “Company”), located in Coppell, Texas, was incorporated in the state of Texas onNovember 4, 1993 and is listed on the NASDAQ Global Select Market under the symbol “MTEX”. The Company develops, markets, and sells high-quality,proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products. We currently sell our products intothree regions: (i) the Americas (the United States, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland,Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia,Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).Independent associates (“associates”) purchase the Company’s products at published wholesale prices to either sell to retail customers or forpersonal use. Members purchase the Company’s products at a discount from published retail prices primarily for personal use. The Company cannotdistinguish products sold for personal use from other sales because it is not involved with the products after delivery, other than usual and customary productwarranties and returns. Only independent associates are eligible to earn commissions and incentives. In addition, the Company operates a non-direct sellingbusiness in mainland China. Our subsidiary in China, Meitai, is operating as a traditional retailer under a cross-border e-commerce model in China. Meitaicannot legally conduct a direct selling business in China until it acquires a direct selling license in China.Principles of ConsolidationThe consolidated financial statements and footnotes include the accounts of the Company and its wholly-owned subsidiaries. All intercompanybalances and transactions have been eliminated in consolidation.Use of EstimatesThe preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles requires the use ofestimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various otherfactors. 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 itsassumptions 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 mostsignificant are described in this note to the consolidated financial statements, Organization and Summary of Significant Accounting Policies.Foreign Currency TranslationThe United States dollar is the functional currency for the majority of the Company’s foreign subsidiaries. As a result, nonmonetary assets andliabilities are remeasured at their approximate historical rates, monetary assets and liabilities are remeasured at exchange rates in effect at the end of the year,and revenues and expenses are remeasured at weighted-average exchange rates for the year. The local currency is the functional currency of our subsidiariesin Columbia, Japan, Republic of Korea, Taiwan, Norway, Sweden, Mexico and China. These subsidiaries’ assets and liabilities are translated into the UnitedStates dollars at exchange rates existing at the balance sheet dates, revenues and expenses are translated at weighted-average exchange rates, andshareholders’ equity and intercompany balances are translated at historical exchange rates. The foreign currency translation adjustment is recorded as aseparate component of shareholders’ equity and is included in accumulated other comprehensive income.Transaction losses totaled approximately $1.8 million and $4.2 million, for the years ended December 31, 2016 and 2015, respectively, and areincluded in other expense, net in the Company’s Consolidated Statements of Operations.F-7Table of ContentsCash and Cash EquivalentsThe Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includesin its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are received within24 to 72 hours. As of December 31, 2016 and 2015, credit card receivables were $0.5 million and $0.4 million, respectively, and cash and cash equivalentsheld in bank accounts in foreign countries totaled $27.5 million and $31.3 million, respectively. The Company invests cash in liquid instruments, such asmoney market funds and interest bearing deposits. The Company also holds cash in high quality financial institutions and does not believe it has anexcessive exposure to credit concentration risk.Restricted CashThe Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve oncredit card sales in the United States and Canada; and (iii) Australia building lease collateral. As of December 31, 2016 and 2015, our total restricted cash was$7.9 million and $8.1 million, respectively.Accounts ReceivableAccounts receivable are carried at their estimated collectible amounts. Receivables are created upon shipment of an order if the credit card paymentis rejected or does not match the order total. As of December 31, 2016 and 2015, receivables consisted primarily of amounts due from members andassociates. The Company periodically evaluates its receivables for collectability based on historical experience, recent account activities, and the length oftime receivables are past due and writes-off receivables when they become uncollectible. At December 31, 2016 and 2015, the Company held an allowancefor doubtful accounts of $0.5 million and $0.3 million, respectively.InventoriesInventories consist of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs thatapproximate average costs) or market. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reservedor written off.Property and EquipmentProperty and equipment are stated at cost, less accumulated depreciation and amortization computed using the straight-line method over theestimated 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 relatedaccumulated depreciation are removed from the accounts and any resulting gain or loss is included in other operating costs in the accompanyingConsolidated Statements of Operations. The estimated useful lives of fixed assets are as follows: Estimated useful lifeOffice furniture and equipment5 to 7 yearsComputer hardware and software3 to 5 yearsAutomobiles3 to 5 yearsLeasehold improvements (1)2 to 10 years(1) The Company amortizes leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term.Property and equipment are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset orgroup of assets may not be recoverable. The impairment review includes a comparison of future projected cash flows generated by the asset or group of assetswith its associated net carrying value. If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interestcharges), an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value.F-8Table of ContentsOn August 29, 2016, we received information indicating that a portion of the capitalized costs related to an item included in our computer hardwareand software asset group would not be completed due to problems with the vendor in completing the code. We evaluated the project and determined a chargewas required due to the abandonment of the project. For the year ending December 31, 2016 we recorded $0.4 million in operating expenses that representedwork that was performed, but which no longer has any value to the Company or any possibility of affecting future cash inflows.Other AssetsAt December 31, 2016 and 2015, other assets were $4.0 million and $3.8 million, respectively. Included in the December 31, 2016 and 2015balances were deposits for building leases in various locations of $2.2 million and $1.9 million, respectively. Also included in the December 31, 2016 and2015 balances were $1.5 million and $1.6 million, respectively, representing a deposit with Mutual Aid Cooperative and Consumer in the Republic of Korea,an organization established by the Republic of Korea’s Fair Trade Commission’s approval to compensate and protect consumers who participate in networkmarketing activities from damages. Other assets at each of December 31, 2016 and 2015 also include $0.2 million of indefinite lived intangible assetsrelating to the Manapol ® powder trademark.Notes PayableNotes payable were $1.4 million and $1.8 million as of December 31, 2016 and December 31, 2015, respectively, as a result of funding from acapital financing agreement related to our investment in computer hardware and software and other financing arrangements. At December 31, 2016, thecurrent portion was $0.8 million and the long-term portion was $0.6 million. At December 31, 2015, the current portion was $0.7 million and the long-termportion was $1.1 million.Other Long-Term LiabilitiesOther long-term liabilities were $1.5 million and $2.0 million for the years ending December 31, 2016 and 2015. At December 31, 2016 and 2015,we recorded $0.2 million and $0.7 million, respectively, in other long-term liabilities related to uncertain income tax positions (see Note 8, Income Taxes).Certain operating leases for the Company’s regional office facilities contain a restoration clause that requires the Company to restore the premises to itsoriginal condition. At December 31, 2016 and 2015, accrued restoration costs related to these leases amounted to $0.6 million and $0.4 million, respectively.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 Japanoperations of $0.5 million at each of December 31, 2016 and 2015, respectively (See Note 10, Employee Benefit Plans).F-9Table of ContentsRevenue Recognition and Deferred CommissionsThe Company’s revenue is derived from sales of individual products, sales of its starter and renewal packs, and shipping fees. Substantially all of theCompany’s product and pack sales are made to associates at published wholesale prices and to members at discounted published retail prices. The Companyrecords 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 recognizedwhen the event is held. The Company defers certain components of its revenue. At December 31, 2016 and December 31, 2015, the Company’s deferredrevenue was $8.2 million and $8.7 million, respectively. Deferred revenue consisted primarily of: (i) sales of packs and products shipped but not received bythe customers by the end of the respective period; (ii) revenue from the loyalty program; and (iii) prepaid registration fees from customers planning to attenda future corporate-sponsored event. The deferred revenue associated with the loyalty program at December 31, 2016 and December 31, 2015 was $7.0 millionand $8.1 million, respectively. In total current assets, the Company defers commissions on (i) the sales of packs and products shipped but not received by thecustomers by the end of the respective period and (ii) the loyalty program. Deferred commissions were $3.2 million and $3.4 million at December 31, 2016and December 31, 2015, respectively.Loyalty program(in thousands)Loyalty deferred revenue as of January 1, 2015$9,703Loyalty points forfeited(8,801)Loyalty points used(15,077)Loyalty points vested20,403Loyalty points unvested1,845Loyalty deferred revenue as of December 31, 2015$8,073Loyalty deferred revenue as of January 1, 2016$8,073Loyalty points forfeited(6,963)Loyalty points used(15,451)Loyalty points vested20,085Loyalty points unvested1,289Loyalty deferred revenue as of December 31, 2016$7,033We estimate a sales return reserve for expected sales refunds based on our historical experience over a rolling six-month period. If actual results differfrom our estimated sales return reserve due to various factors, the amount of revenue recorded for each period could be materially affected. Historically, oursales 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 afterthe original sale. Sales returns have historically averaged 1.5% or less of our gross sales. For the year ended December 31, 2016 our sales return reserveconsisted of the following (in thousands): December 31, 2016Sales reserve as of January 1, 2016$147Provision related to sales made in current period1,326Adjustment related to sales made in prior periods8Actual returns or credits related to current period(1,207)Actual returns or credits related to prior periods(145)Sales reserve as of December 31, 2016$129F-10Table of ContentsShipping and Handling CostsThe Company records freight and shipping fees collected from its customers as revenue. The Company records inbound freight as a component ofinventory and cost of sales.Commission and Incentive ExpensesAssociates earn commissions and incentives based on their direct and indirect commissionable net sales over 13 business periods each year. Eachbusiness period equals 28 days. The Company accrues commissions and incentives when earned by associates and pays commissions on product sales threeweeks following the business period end and pays commissions on its pack sales five weeks following the business period end.Advertising ExpensesThe Company expenses advertising and promotions in selling and administrative expenses when incurred. Advertising and promotional expenseswere approximately $6.0 million and $5.5 million, for the years ended December 31, 2016 and 2015, respectively. Educational and promotional items, calledsales aids, are sold to associates to assist in their sales efforts and are included in inventories and charged to cost of sales when sold.Research and Development ExpensesThe 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 $1.4 million and $1.7 million, respectively, for the years ended December 31, 2016 and 2015.Salaries and contract labor are included in selling and administrative expenses and all other research and development costs are included in other operatingcosts.Stock-Based CompensationThe Company currently has one active stock-based compensation plan, which was approved by its shareholders at its 2008 Annual Shareholder’smeeting and amended at the 2010, 2012, and 2014 Annual Shareholder meetings. The Company grants stock options to its employees, consultants, andboard 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 ofstock options vest over two or three years. Incentive stock options granted to shareholders who own 10% or more of the Company’s outstanding stock aregranted 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 nogreater than five years. At the date of grant, the Company determines the fair value of the stock option award and recognizes compensation expense over therequisite service period, or the vesting period of the award. The fair value of the stock option award is calculated using the Black-Scholes option-pricingmodel. The Company records stock-based compensation expense in selling and administrative expenses.Software Development CostsThe Company capitalizes qualifying internal payroll and external contracting and consulting costs related to the development of internal usesoftware 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. TheCompany 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 CostsOther operating costs include travel, accounting/legal/consulting fees, credit card processing fees, banking fees, off-site storage fees, utilities, andother miscellaneous operating expenses.F-11Table of ContentsIncome TaxesThe Company determines the provision for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respectivetax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxableincome 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 changein tax rates is recognized as income in the period that includes the enactment date. The Company evaluates the probability of realizing the future benefits ofits 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 inthe future does not meet the more likely than not criterion for recognition. The Company recognizes the effect of income tax positions only if those positionsare more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of beingrecognized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes bothinterest and penalties related to uncertain tax positions as part of the income tax provision.Comprehensive Income and Accumulated Other Comprehensive IncomeComprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events andcircumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners anddistributions to owners. The Company’s comprehensive income consists of the Company’s net income, foreign currency translation adjustments from itsColumbia, Japan, Republic of Korea, Taiwan, Norway, Sweden, Mexico and China operations, and changes in the pension obligation for its Japaneseemployees.Concentration RiskA significant portion of our revenue is derived from five products: NutriVerus™, PLUS™, TruHealth, and our core Ambrotose ® complex products,which include the Ambrotose ® products and Advanced Ambrotose® products. A decline in sales value of such products could have a material adverse effecton our earnings, cash flows, and financial position. Revenue from these products were as follows for the years ended December 31, 2016 and 2015 (inthousands, except percentages): 20162015 Sales byproduct% of totalnet salesSales byproduct% of totalnet salesAdvanced Ambrotose ®$55,86331.0%$59,02632.7%Ambrotose ®10,1965.6%9,6865.4%NutriVerus ™7,7244.3%8,5414.7%PLUS ™7,9354.4%8,2394.6%TruHealth9,2205.1%——%Total$90,93850.4%$85,49247.4%Our business is not currently exposed to customer concentration risk given that no independent associate has ever accounted for more than 10% ofour consolidated net sales.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 andperiodically evaluates the credit rating of such institutions and the allocation of their investments to minimize exposure to credit concentration risk.Fair Value of Financial InstrumentsThe fair value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, time deposits, money marketinvestments, receivables, payables, and accrued expenses, approximate their carrying values due to their relatively short maturities. See Note 3 to ourConsolidated Financial Statements, Fair Value, for more information.F-12Table of ContentsNOTE 2: RECENT ACCOUNTING PRONOUNCEMENTSIn May 2014, the FASB issued Accounting Standards Update “ASU” 2014-09, Revenue from Contracts with Customers. This new standard requirescompanies to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a companyexpects to be entitled in exchange for those goods or services. Under the new standard, revenue is recognized when a customer obtains control of a good orservice. The standard allows for two transition methods - entities can either apply the new standard (i) retrospectively to each prior reporting period presented,or (ii) retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. In July 2015, the FASB issuedASU 2015-14, Revenue from Contracts with Customers, which defers the effective date by one year to December 15, 2017 for fiscal years, and interim periodswithin those fiscal years, beginning after that date. In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers, Principal versusAgent Considerations (Reporting Revenue versus Net), in April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers, identifyingPerformance Obligations and Licensing, and in May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, Narrow-ScopeImprovements and Practical Expedients, which provide additional clarification on certain topics addressed in ASU 2014-09. ASU 2016-08, ASU 2016-10,and ASU 2016-12 follow the same implementation guidelines as ASU 2014-09 and ASU 2015-14. An implementation team has gained an understanding ofthe standard’s revenue recognition model, is completing the review and documentation of our contracts, and is analyzing whether enhancements are neededto our business and accounting systems.In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). Under ASU 2016-02, an entity will be required torecognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specificaccounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitativeinformation about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising fromleases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods withinthat reporting period, and requires a modified retrospective adoption, with early adoption permitted. Management is currently in the initial stages ofevaluating the future impact of ASU 2016-02 on its consolidated financial position, results of operations and cash flows.In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting, which is intended to simplify the accounting for share-based compensation. The area for simplification in ASU 2016-09 involves several aspectsof the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities. Theupdate is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Management is unable to estimatethe impact of this update since the amount of excess benefits and deficiencies are dependent on the Company's stock price at the time a stock award vests oris exercised.In November 2016, the FASB issued ASU No. 2016-18 (ASU 2016-18), Restricted Cash (Subtopic 230) which addresses the diversity in theclassification and presentation of changes in restricted cash on the statement of cash flows. The amendment requires that a statement of cash flows explain thechange during the period in the total of cash. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted.Management is currently in the initial stages of evaluating the future impact of ASU 2016-18 on its consolidated financial position, results of operations andcash flows.Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on the Company’s presentor future financial statements.F-13Table of ContentsNOTE 3: FAIR VALUEThe Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures.Fair Value Measurements (Topic 820) of the FASB establishes a fair value hierarchy that requires the use of observable market data, when available,and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:•Level 1—Quoted unadjusted prices for identical instruments in active markets.•Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not activeand 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 assumptionsdeveloped by the Company.The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk.The investment instruments held by the Company are money market funds and interest bearing deposits for which quoted market prices are readily available.The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchybecause 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, 2016and 2015. The Company did not have any material financial liabilities that were required to be measured at fair value on a recurring basis at December 31,2016 and 2015.2016Level 1 Level 2 Level 3 TotalAssets Money Market Funds – Fidelity, US$12 $— $— $12Interest bearing deposits – various banks19,357 — — 19,357Total$19,369 $— $— $19,369Amounts included in: Cash and cash equivalents$13,326 $— $— $13,326Restricted cash737 — — 737Long-term restricted cash5,306 — — 5,306Total$19,369 $— $— $19,3692015Level 1 Level 2 Level 3 TotalAssets Money Market Funds – Fidelity, US$319 $— $— $319Interest bearing deposits – various banks14,134 — — 14,134Total$14,453 $— $— $14,453Amounts included in: Cash and cash equivalents$8,281 $— $— $8,281Restricted cash737 — — 737Long-term restricted cash5,435 — — 5,435Total$14,453 $— $— $14,453F-14Table of ContentsNOTE 4: INVENTORIESInventories consist of raw materials, finished goods, and promotional materials. The Company provides an allowance for any slow-moving orobsolete inventories. Inventories as of December 31, 2016 and 2015, consisted of the following (in thousands): 2016 2015Raw materials$239 $1,187Finished goods12,103 9,277Inventory reserves for obsolescence(381) (1,265)Total$11,961 $9,199NOTE 5: PROPERTY AND EQUIPMENTFor the year ended December 31, 2016, construction in progress was $1 million, which is primarily comprised of back-office software projects within service dates that are currently indeterminable. As of December 31, 2016 and 2015, property and equipment consisted of the following (in thousands): 2016 2015Office furniture and equipment$7,791 $8,576Computer hardware7,100 7,747Computer software48,316 47,724Automobiles81 81Leasehold improvements12,351 12,393 75,639 76,521Less accumulated depreciation and amortization(72,028) (72,673)Property and equipment, net3,611 3,848Construction in progress1,012 839Total$4,623 $4,687NOTE 6: CAPITAL LEASE OBLIGATIONSAs of December 31, 2016 and 2015, the net book value of leased assets was $0.7 million and $1.1 million, respectively for leased equipment andpurchased licenses. The future minimum lease payments (in thousands) are as follows:2017$3762018206201952202012Total future minimum lease payments646Less: Amounts representing interest (effective interest rate 5.49%)(28)Present value of minimum lease payments618Current portion of capital lease obligations357Long-term portion of capital lease obligations$261F-15Table of ContentsNOTE 7: ACCRUED EXPENSESAs of December 31, 2016 and 2015, accrued expenses consisted of the following (in thousands): 2016 2015Accrued asset purchases$341 $277Accrued compensation1,533 1,620Accrued royalties75 68Accrued sales and other taxes1,446 2,323Other accrued operating expenses675 562Customer deposits and sales returns137 153Accrued travel expenses related to corporate events255 271Accrued shipping and handling costs290 257Rent expense219 76Accrued legal and accounting fees634 614 $5,605 $6,221 NOTE 8: INCOME TAXESThe components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (inthousands): 2016 2015United States$(2,368) $769Foreign1,413 7,430 $(955) $8,199The components of the Company’s income before income taxes are attributable to the following jurisdictions for the years ended December 31 (inthousands):Current provision (benefit):2016 2015Federal$(396) $(336)State59 21Foreign1,438 2,518 1,101 2,203Deferred provision (benefit): Federal(95) 191State(25) 72Foreign(1,350) (106) (1,470) 157 $(369) $2,360F-16Table of ContentsA reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for theyears ended December 31: 2016 2015Federal statutory income taxes35.0 % 35.0 %State income taxes, net of federal benefit(4.1) 1.0Difference in foreign and United States tax on foreign operations9.5 (14.8)Effect of changes in valuation allowance59.0 (8.7)Effect of change in uncertain tax positions (net)12.8 (0.2)Federal Sub-Part F Income from foreign operations(27.4) 5.1Foreign Exchange(45.7) 5.3Other(0.4) 6.2 38.7 % 28.9 %For the years ended December 31, 2016 and 2015, the Company’s effective tax rate was 38.7% and 28.9%, respectively. For 2016, the Company hada tax benefit due to loss before income tax. Items decreasing the effective income tax rate included the favorable rate difference from foreign jurisdictions,return to provision adjustment, release of value allowances with respect to Switzerland and certain tax reserve items removed due to expiration of applicablestatute of limitations. Items increasing the effective income tax rate included foreign exchange losses and “Subpart F income” resulting from controlledforeign corporation operations. For 2015, the effective tax rate was less than what would have been expected if the federal statutory rate was applied toincome before taxes. Items decreasing the effective income tax rate included the lower statutory tax rates in foreign jurisdictions compared to the U.S. and themix of foreign income and U.S. income. In addition, the rate decreased for an overall reduction in the valuation allowances associated with certain deferredtax assets.F-17Table of ContentsDeferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities consisted of thefollowing at December 31 (in thousands):Deferred tax assets:2016 2015Deferred revenue$492 $567Inventory capitalization258 209Inventory reserves82 376Accrued expenses799 1,213Depreciation and amortization2,181 1,788Net operating loss(1)6,021 5,378Deferred royalty18 16Non-cash accounting charges related to stock options and warrants715 684Foreign tax credit carryover3,797 3,568Other932 825Total deferred tax assets$15,295 $14,624Valuation allowance(8,458) (9,028)Total deferred tax assets, net of valuation allowance$6,837 $5,596Deferred tax liabilities: Prepaid expenses$380 $406Deferred commissions742 846Internally-developed software205 266Fixed Assets178 1Total deferred tax liabilities$1,505 $1,519(1) The Company’s net operating loss will expire as follows (dollar amounts in thousands):JurisdictionGross NOL TaxEffectedNOL ExpirationYearsAustralia$114 $34 IndefiniteCanada$12 $3 2026China(1) $12 $3 2021Colombia$1,003 $341 IndefiniteCyprus$17 $2 2021Denmark$4 $1 IndefiniteHong Kong$49 $8 IndefiniteMexico$7,965 $2,390 2020-2026Norway$137 $34 IndefiniteRussia(2)$21 $4 IndefiniteSingapore$127 $22 IndefiniteSouth Africa$132 $37 IndefiniteSweden$490 $108 IndefiniteSwitzerland$15,059 $1,366 2017-2023Taiwan$7,322 $1,245 2017-2026Ukraine(3)$581 $105 IndefiniteUnited Kingdom$203 $41 IndefiniteUnited States(states)$11,082 $277 2017-2036 (1) On February 24, 2016, the Company established a legal entity in China.(2) On August 1, 2016, the Company established a legal entity in Russia.(3) On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity.F-18Table of ContentsIn addition to net operating loss attributes, the Company has recorded a foreign tax credit carryforward of $3.8 million, which will begin to expire in2019 and a charitable contribution carryforward of $0.3 million, which will expire between years 2017 through 2021. The Company maintains a fullvaluation against both the foreign tax credits and the charitable contribution carryforward.At December 31, 2016 and 2015, the Company’s valuation allowance was $8.5 million and $9.0 million, respectively. The provisions of ASC Topic740 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 companyis to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect ofsuch evidence is commensurate with the extent the evidence can be objectively verified.The valuation allowances presented below (in millions) at December 31, 2016 and 2015, represented a reserve against the Company’s net deferredtax asset the Company believed the “more likely than not” criterion for recognition purposes could not be met. The U.S. valuation allowance increased dueto the carryover of foreign tax credits that we do not anticipate to utilize in future years.Country2016 2015Colombia$0.3 $—Mexico2.4 2.5Sweden0.1 0.1Switzerland0.1 1.0Taiwan1.3 1.2Ukraine0.1 0.1United States4.1 4.0Other Jurisdictions0.1 0.1Total$8.5 $9.0At December 31, 2016 and 2015, the Company did not record a provision for any United States or foreign withholding taxes on its undistributedearnings related to its foreign subsidiaries because it is the intention of the Company to reinvest its undistributed earnings indefinitely in its foreignoperations. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. AtDecember 31, 2016, 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): 2016 2015Current deferred tax assets$7 $460Noncurrent deferred tax assets5,361 3,725Current deferred tax liabilities— (84)Other long-term liabilities(29) (24)Net deferred tax assets$5,339 $4,077F-19Table of ContentsOn January 1, 2007, the Company adopted FIN 48, which was codified into Topic 740, which prescribes a comprehensive model for how a companyshould recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. Topic740 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on thetechnical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefitthat has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2016, the Company recorded $0.6 million incurrent liabilities and $0.2 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with variousaudits. At December 31, 2016, the Company had gross tax-affected unrecognized tax benefits of $0.7 million that, if recognized, would impact the effectivetax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the years ended December 31, 2016 and 2015 (inthousands): 2016 2015Balance as of January 1$715 $803Additions for tax positions related to the current year90 —Additions for tax positions of prior years54 —Reductions of tax positions of prior years(126) (71)Settlements— (17)Balance as of December 31$733 $715The Company recognizes interest and/or penalties related to uncertain tax positions in current income tax expense. As of December 31, 2016 andDecember 31, 2015, the Company had accrued interest and penalties of $0.3 million and $0.2 million in the consolidated balance sheet, of which $42thousand and $26 thousand were accrued in the consolidated statement of operations. Although it is not reasonably possible to estimate the amount by whichunrecognized tax benefits may increase or decrease within the next twelve months due to uncertainties regarding the timing of any examinations, theCompany expects its unrecognized tax benefits to decrease by $0.5 million due to the lapse of statutes of limitations during the next twelve months.The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2016,the tax years that remained subject to examination by a major tax jurisdiction for the Company’s most significant subsidiaries were as follows:JurisdictionOpenYearsAustralia2012-2016Canada2012-2016Denmark2013-2016Japan2013-2016Mexico2012-2016Norway2010-2016Republic of Korea2011-2016Singapore2012-2016South Africa2013-2016Sweden2011-2016Switzerland2011-2016Taiwan2011-2016United Kingdom2010-2016United States2013-2016F-20Table of ContentsNOTE 9: TRANSACTIONS WITH RELATED PARTIES AND AFFILIATESThe Company made cash donations of $0.6 million and $0.9 million to the M5M Foundation for the year ended December 31, 2016 andDecember 31, 2015, respectively. The M5M Foundation is a 501(c)(3) charitable organization that works to combat the epidemic of childhood malnutritionon a global scale. Several of the Company’s directors and officers and their family members serve on the board of the M5M Foundation, including:•Al Bala, the Company’s President;•Chris Simons, the Company’s Regional Vice President EMEA/North America;•Landen Fredrick, Senior Vice President, Global Operations and son of J. Stanley Fredrick, the Company’s Chairman of the Board and a majorshareholder; and•Lorrie Fry, the daughter of Larry Jobe (a member of our Board).We paid employment compensation of approximately $293,500 in 2016 and $251,000 in 2015 for salary, bonus, auto allowance, and othercompensation to Landen Fredrick. Landen Fredrick is the son of J. Stanley Fredrick, the Company’s Chairman of the Board and a major shareholder. Inaddition, Landen Fredrick participated in the employee health care benefit plans available to all employees of the Company. Landen Fredrick has served asSenior Vice President, Global Operations since August of 2016. Prior to that, Mr. Fredrick served as Senior Vice President, Supply Chain and IT since Augustof 2015, Vice President, Global Operations since May of 2013, Vice President, North American Sales and Operations since January of 2011, Vice President,North American Sales since February of 2010 and as Senior Director of Tools and Training since his hire in May of 2006. Landen Fredrick also serves on theBoard of the M5M Foundation.Mr. Ray Robbins is a major shareholder and served as a member of the Company's Board of Directors until December of 2016. Mr. Robbins holdspositions in the Company’s associate global downline network marketing system. In addition, several of Mr. Robbins’ family members are independentassociates. The Company pays commissions and incentives to its independent associates and during 2016 and 2015, the Company paid aggregatecommissions and incentives to Mr. Robbins and his family of approximately $2.9 million and $3.2 million, respectively. The aggregate amount ofcommissions and incentives paid to Mr. Robbins was approximately $2.7 million and $2.9 million in 2016 and 2015, respectively. The aggregate amount ofcommission and incentives paid to family members was approximately $0.2 million and $0.3 million in 2016 and 2015, of which $0.2 million was paid eachyear to his son, Kevin Robbins, who is a member of the Company's Board of Directors and serves on the Science and Marketing Committee and is consultingon the associate commission plan. In addition, less than $0.1 million and $0.1 million in 2016 and 2015, respectively, was paid to his daughter, Marla Finley,and daughter-in-law, Demra Robbins, who both share an account. All commissions and incentives paid to Mr. Robbins and his family members are inaccordance with the Company’s global associate career and compensation plan. The Company has also contracted with a software development firm ownedby Ryan Robbins, the son of Mr. Ray Robbins. The value of services performed during each of 2016 and 2015 were less than $0.1 million.Johanna Bala, the wife of Al Bala, the Company’s Chief Executive Officer and President, is an independent associate who earns commissions andincentives. The aggregate amount of commission and incentives paid to Johanna Bala was approximately $0.1 million and $0.2 million in 2016 and 2015,respectively.NOTE 10: EMPLOYEE BENEFIT PLANSEmployee Retirement PlanEffective May 9, 1997, the Company adopted a Defined Contribution 401(k) and Profit Sharing Plan (the “401(k) Plan”) for its United States andCanada 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 oftwenty-one. United States employees can contribute up to 100 percent of their annual compensation but are limited to the maximum annual dollar amountallowable under the Internal Revenue Code. The 401(k) plan permits matching and discretionary employer contributions. The Company’s matchingcontributions for its United States and Canada employees vest ratably over a five-year period. During each of the years ended December 31, 2016 and 2015,the Company contributed approximately $0.4 million and $0.2 million to the 401(k) Plan for matching contributions respectively.F-21Table of ContentsThe Company also sponsors a non-U.S. defined benefit plan covering its employees in its Japan subsidiary (the “Benefit Plan”). Benefits under theBenefit Plan are based on a point system for position grade and years of service. The Company utilizes actuarial methods. Inherent in the application of theseactuarial methods are key assumptions, including, but not limited to, discount rates and expected long-term rates of return on plan assets. Changes in therelated 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 benefitsrelated to the Benefit Plan.Projected Benefit Obligation and Fair Value of Plan AssetsThe 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:2016 2015Balance, beginning of year$479 $549Service cost83 75Interest cost2 3Liability (gain) loss6 (4)Benefits paid to participants(138) (141)Foreign currency19 (3)Balance, end of year$451 $479 Plan assets:2016 2015Fair value, beginning of year$— $—Company contributions138 141Benefits paid to participants(138) (141)Fair value, end of year$— $—Funded status of the Benefit Plan as of December 31 (in thousands):2016 2015Benefit obligation$(451) $(479)Fair value of plan assets— —Excess of benefit obligation over fair value of plan assets$(451) $(479)Amounts recognized in the accompanying Consolidated Balance Sheets consist of, as ofDecember 31 (in thousands):2016 2015Accrued benefit liability$(451) $(479)Transition obligation and unrealized gain(307) (339)Net amount recognized in the consolidated balance sheets$(758) $(818) Years Ended December 31,Other changes recognized in comprehensive income (in thousands):2016 2015Net periodic cost$46 $43Current year actuarial (gain) loss6 (4)Amortization of transition obligation(4) (4)Total recognized in other comprehensive income (loss)2 (8)Total recognized in comprehensive income$48 $35F-22Table of Contents As of December 31,Amounts not yet reflected in net periodic benefit cost and included in accumulated othercomprehensive gain (in thousands):2016 2015Transition obligation$30 $22Prior service cost283 313Net actuarial gain (loss)(6) 4Total recognized in accumulated other comprehensive gain$307 $3392017 estimated amounts of amortized transition obligation (in thousands):2017Transition obligation$(4) As of December 31,Aggregate Benefit Plan information and accumulated benefit obligation in excess of plan assets(in thousands):2016 2015Projected benefit obligation$451 $479Accumulated benefit obligation451 479Fair value of plan assets— —The weighted-average assumptions to determine the benefit obligation and net cost are as follows: 2016 2015Discount rate0.30% 0.40%Rate of increase in compensation levels— —Components of ExpensePension expense for the Benefit Plan is included in selling, general and administrative expenses in the Consolidated Statements of Operations and iscomprised of the following for the years ended December 31 (in thousands): 2016 2015Service cost$83 $75Interest cost2 3Amortization of transition obligation4 4Prior service cost(43) (39)Total pension expense$46 $43Estimated Benefits and ContributionsThe Company expects to contribute approximately $21,000 to the Benefit Plan in 2017. As of December 31, 2016, benefits expected to be paid bythe Benefit Plan for the next ten years is approximately as follows (in thousands):2017$21201822201926202028202136Next five years478Total expected benefits to be paid$611F-23Table of ContentsNOTE 11: STOCK OPTION PLANSummary of Stock PlanThe Company currently has one active stock-based compensation plan, which was approved by shareholders. The Company grants stock options toemployees, 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 ofstock 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 anexercise 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 thanfive years.In February 2008, the Company’s Board of Directors approved the Mannatech, Incorporated 2008 Stock Incentive Plan (as amended, the “2008Plan”), which reserved up to 100,000 (as adjusted for a 1-for-10 reverse stock split) shares of common stock for issuance of stock options and restricted stockto our employees, board members, and consultants, plus any shares reserved under the Company’s then-existing, unexpired stock plans for which options hadnot yet been issued, and any shares underlying outstanding options under the then-existing stock option plans that terminate without having been exercisedin full. The 2008 Plan was approved by the Company’s shareholders at the 2008 Annual Shareholders’ Meeting and was amended at the 2012 AnnualShareholders’ Meeting to increase the number of shares of common stock subject to the plan by 100,000 and amended again at the 2014 Annual ShareholderMeeting to increase the number of shares of common stock subject to the plan by an additional 130,000. As of December 31, 2016, the 2008 Plan had 80,397stock 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, 2016, is as follows: 2016 Number ofOptions(in thousands) Weightedaverageexerciseprice Weightedaverageremainingcontractuallife(in years) Aggregateintrinsicvalue (inthousands)Outstanding at beginning of year226 $16.64 Granted15 19.88 Exercised(7) 5.59 Expired(5) 42.81 Other23 16.64 Outstanding at end of year252 16.65 6.29 $921Options exercisable at year end217 $16.34 5.93 $862During 2016, the Company issued 7,001 new shares upon the exercise of options, and granted 15,000 new options to members of the Board. Optionsexercised during the year ending December 31, 2016 and December 31, 2015 had a total intrinsic value, calculated as the difference between the exercisedate stock price and the exercise price of less than $0.1 million. Non-vested shares at December 31, 2016 and 2015 were approximately 35,000 and 77,000,respectively.F-24Table of ContentsValuation and Expense Information Under FASB ASC Topic 718 Compensation – Stock CompensationUnder the provisions of FASB ASC Topic 718, the Company is required to measure and recognize compensation expense related to any outstandingand unvested stock options previously granted, and thereafter recognize, in its consolidated financial statements, compensation expense related to any newstock 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 onhistorical information. The following assumptions were used to calculate the compensation expense and the calculated fair value of stock options grantedeach year: 2016 2015 Dividend yield:2.5%—Risk-free interest rate:1.1 – 1.7%1.2 – 1.6%Expected market price volatility:67.4 – 73.5%79.1 – 80.1%Average expected life of stock options:4.5 years 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 theCompany’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 was $11.90 per share, during each of the years ended December 31, 2016 and2015. The total fair value of shares vested during the years ended December 31, 2016 and 2015 was $0.5 million and $0.6 million, respectively.The Company recorded the following amounts related to the expense of the fair values of options during the years ended December 31, 2016 and2015 (in thousands): 2016 2015Selling, general and administrative expenses and income from operations before income taxes$690 $575Benefit for income taxes(86) (137)Effect on net income$604 $438As of December 31, 2016, the Company had approximately $0.4 million of total unrecognized compensation expense related to stock optionscurrently outstanding, to be recognized in future years, ending December 31, as follows (in thousands): Total gross unrecognizedcompensation expense Total tax benefitassociatedwith unrecognizedcompensation expense Total netunrecognizedcompensationexpense2017$225 $37 $1882018106 13 93201929 — 29 $360 $50 $310F-25Table of ContentsNOTE 12: COMMITMENTS AND CONTINGENCIESOperating LeasesThe Company leases certain office space, automobiles, computer hardware, and warehouse equipment under various non-cancelable operatingleases. Some of these leases have renewal options. All of the Company’s leases expire at various times through December 2021. The Company also leasesequipment under various month-to-month cancelable operating leases. For the years ended December 31, 2016 and 2015, total rent expense wasapproximately $3.7 million and $3.6 million, respectively.Approximate future minimum rental commitments for non-cancelable operating leases (in thousands) are as follows:Years ending December 31, 2017$2,68920181,5732019784202011920213Thereafter— $5,168Purchase CommitmentsThe Company maintains supply agreements with its suppliers and manufacturers. Some of the supply agreements contain exclusivity clauses and/orminimum annual purchase requirements. In November 2016, the Company entered into a four-year supply agreement to purchase an aloe vera powder inwhole leaf aloe form and an aloe vera gel extract from Natural Aloe de Costa Rica, S.A. As of December 31, 2016, the Company is required to purchase anaggregate of $19 million through 2020.Royalty and Consulting AgreementsThe Company utilizes royalty agreements with individuals and entities to provide compensation for items relating to developed products, websitesand email provided to our associates. The Company paid royalties of $0.2 million for each of the years ended December 31, 2016 and December 31, 2015.Employment AgreementsThe Company has non-cancelable employment agreements with certain executives. If the employment relationships with these executives wereterminated, as of December 31, 2016, the Company would continue to be indebted to the executives for $1.0 million, payable through 2017.F-26Table of ContentsNOTE 13: LITIGATIONBreach of ContractUniscience Solution v. Chang, et al.; Chang, et al. v. Uniscience Solution, Randy Lee, and Mannatech, Inc. (cross-defendant), Case No. 16K03995(Superior Court of California, Los Angeles Co.)On June 1, 2016, the Company received notice that on May 20, 2016 Vivian Hsiaoling Chang and Alan Jyh Woei Hsu (collectively, the “Cross-plaintiffs”) filed an unverified cross-complaint against the Company, Uniscience Solution, and Randy Lee alleging breach of contract. Cross-plaintiffs,Uniscience Solution and Randy Lee are independent distributors of the Company who entered into an agreement, separate and apart from their respectivedistributor agreements with the Company. The Cross-plaintiffs assert that Mannatech is somehow a party to that other agreement; which it is not. Cross-Plaintiffs are seeking damages in the amount of $22,229, plus special and punitive damages according to proof at trial and costs of suit. The Company filedan answer denying the assertions in the unverified cross-complaint. On September 23, 2016, the Cross-plaintiffs and Uniscience Solution entered into asettlement agreement. On September 27, 2016, the Cross-plaintiffs filed a Request for Dismissal with the Court dismissing all claims against the Companywith prejudice. On October 26, 2016, the Company received notice from its counsel that the Court entered the Dismissal on October 3, 2016. This matter isclosed.Diana Anselmo and New Day Today Corporation v. Mannatech, Incorporated, Case No. DC-15-01904, Judicial District Court, Dallas County, TexasOn February 18, 2015, Diana Anselmo and New Day Today Corporation (collectively, the “Plaintiffs”) filed suit against the Company allegingbreach of contract pertaining to a portion of proceeds from a Mannatech Associate position once held by Ray Gebauer, alleged to be Ms. Anselmo’s formerhusband. Plaintiffs seek damages under the contract of approximately $600,000 in past commissions and between $2 million and $3.1 million in futurecommissions, an award of attorney’s fees, and a declaration that the Company must continue to pay Plaintiffs proceeds from Mr. Gebauer’s former account.The Company filed its original answer on March 25, 2015, denying Plaintiffs’ allegations. The Company asserts that Plaintiffs cannot establish theconditions precedent to their breach of contract claim and thus are not entitled to any damages. The Company further asserts affirmative defenses of failure ofconsideration, lack of standing, prior breach, and estoppel. The Company also seeks a declaratory judgment of its rights under the contract and seeks returnof certain commissions paid to Plaintiffs that were not earned under the contract.The Company filed a Motion for Summary Judgment on June 15, 2016, on the ground that Plaintiffs could not establish conditions precedent totheir recovery as a matter of law. Mediation was conducted on June 17, 2016; however a final settlement could not be reached. The Court denied theCompany’s Motion for Summary Judgment on August 31, 2016. Plaintiffs filed a Motion for Summary Judgment on July 22, 2016, seeking dismissal of theCompany’s counterclaim for damages. The Court denied that motion on November 18, 2016. The parties filed cross-motions for summary judgment onNovember 1, 2016, asking the Court to interpret certain provisions of the contract as a matter of law. By order dated November 21, 2016, the Court deniedthe Company’s motion and granted the Plaintiffs’ motion on contract interpretation, finding that the contract affords Ms. Anselmo an ownership interest inMr. Gebauer’s former account and that account remains eligible to earn commissions.Discovery is complete. On March 3, 2017, the parties received notice from the Court that the case is scheduled for trial on June 5, 2017. It is notpossible at this time to predict whether the Company will incur any liability, or to estimate the ranges of damages, if any, which may be incurred inconnection with this matter. However, the Company believes it has a valid defense and will vigorously defend this claim. This matter remains open.F-27Table of ContentsAdministrative ProceedingsMannatech Korea, Ltd. v. Busan Custom Office, Busan District Court, KoreaOn or before April 12, 2015, Mannatech Korea, Ltd. filed a suit against the Busan Custom Office (“BCO”) to challenge BCO’s method of calculationregarding its assessment notice issued on July 11, 2013. The assessment notice included an audit of the Company’s imported goods covering fiscal years2008 through 2012 and required the Company to pay $1.0 million for this assessment, all of which was paid in January 2014. Both parties submitted aresponse to the Court’s inquiry on January 15, 2016. The final hearing for the case was held on May 26, 2016 where each party presented their respectivearguments. The Court set the decision hearing on October 27, 2016, and the Court decided the case in the Company’s favor. However, on November 18,2016, BCO filed an appeal to the Busan High Court. On March 7, 2017, the Company received notice that the first hearing for the appeal is scheduled forMarch 31, 2017. This matter remains open.Patent LitigationMannatech, Incorporated v. Wellness Quest, LLC and Harley Reginald McDaniel, Case No. 3:14-cv-2497, U.S. District Court, for the Northern District ofTexas, Dallas DivisionOn July 11, 2014 the Company filed a patent infringement lawsuit against Wellness Quest, LLC and Dr. H. Reginald McDaniel (“Defendants”)alleging the Defendants infringe United States Patent Nos. 7,157,431 and 7,202,220, both entitled “Compositions of Plant Carbohydrates as DietarySupplements,” (the “Patents”) and seeking to stop their manufacture, offer, and sale of infringing glyconutritional dietary supplement products. On July 16,2014, the Company filed a Motion for Preliminary Injunction preventing Defendants from infringing the Patents pending a final decision on the merits. OnAugust 29, 2014, the Defendants filed their Response to Plaintiff’s Motion for Preliminary Injunction and Brief in Support along with their Answer andAffirmative Defenses. On November 4, 2014, the Court denied the Company’s Motion for Preliminary Injunction and Motion to Expedite Discovery. OnDecember 15, 2014, the Company deposed Dr. Reginald McDaniel. Each party submitted its list of claim constructions/definitions and a list of thesupporting authority. Each party filed its opening brief and their respective responsive briefs. Defendants have designated an expert and the Companydeposed the expert on January 27, 2015 regarding his claim construction opinions while reserving the right to examine him later regarding other matters. The parties remain engaged in the claim construction process. Mediation on this matter was held on April 24, 2015 and a settlement was not reached.On May 12, 2015, the Company received notice of an Order of Transfer advising that the case had been reassigned from Judge Ed Kinkeade to JudgeDavid C. Godbey for all further proceedings. On July 20, 2015, the Court issued its Markman ruling adopting the Company’s proposed claim construction forall disputed terms except for “dietary supplement composition” which it found needed no construction. On August 20, 2015, Defendants filed a request for aninterlocutory appeal, and the Company filed a reply on October 6, 2015. The Company also filed a separate motion requesting entry of a final judgment andpermanent injunction on September 8, 2015.On November 5, 2015, the Court issued an Order accepting Defendant’s stipulation of infringement under the Court’s claim interpretation andgranted the Company’s partial motion for summary judgment and issued a permanent injunction against Defendants’ infringement of the Patents. The Courtstayed the permanent injunction until the conclusion of Defendants’ appeal to the U.S. Court of Appeals for the Federal Circuit (the “Court of Appeals”). OnDecember 3, 2015, Defendants filed their Notice of Appeal which was docketed by the Court of Appeals on December 8, 2015. Defendants-Appellants filedtheir brief with the Court of Appeals on February 28, 2016. The Company-Appellee filed its brief with the Court of Appeals on March 24, 2016. Oralargument for the appeal was held on August 1, 2016. On August 5, 2016, the Court of Appeals issued a per curium opinion affirming the trial court’sjudgment in favor of the Company. On August 10, 2016, the Company filed a motion to lift the stay of permanent injunction previously issued by the trialcourt. On August 24, 2016, the Company received confirmation from its counsel that Defendants changed the formulation of the infringing product to aformulation proposed by the Company. Defendants filed their response to the Company’s motion on August 31, 2016. The parties conferred via telephoneand electronic mail on August 31, 2016 and September 1, 2016 regarding the Company’s motion and Defendants’ response. On September 1, 2016, theCompany filed an Amended Certificate of Conference with the Court advising that the Company’s motion was now unopposed. On October 18, 2016, theCourt entered an order lifting the stay and putting the permanent injunction back into full effect. The case is now in the damages phase and the Company willseek attorneys’ fees and have initiated collection of discovery for the assessment of damages. This matter remains open.This lawsuit continues the Company’s enforcement of its patent rights, and the Company intends to vigorously prosecute these matters. Based onthe previous successful patent infringement lawsuits against Country Life, LLC, Glycobiotics International, Inc., Techmedica Health, Inc., IonX Holdings,Inc., Boston Mountain Laboratories, Inc., Green Life, LLC, and Xiong Lo and RBCF-28Table of ContentsLife Sciences, Inc. and RBC Life Sciences USA, Inc., the Company believes there is a strong likelihood that it will obtain permanent injunctions against themanufacture and sale of any infringing products for the duration of the Company’s patents.Arbitration ProceedingMannatech v. Samuel L. Caster and Wonder Enterprises, LLC, Demand for Arbitration, Case No. 01-15-0003-6812On May 29, 2015 the Company initiated arbitration proceedings against Samuel L. Caster and Wonder (“Respondents”) alleging breach of contractby Mr. Caster and his company, Wonder, in a series of consulting agreements entered into by the parties. Mannatech seeks to recover actual damages, costs ofcourt and prejudgment interest together with disgorgement of all benefits received by Caster and Wonder. The Company estimates its damages to be between$500,000 and $3,500,000. On June 12, 2015 Respondents contacted the Company’s counsel to request mediation. The parties have agreed to mediate thisdispute; mediation was held on August 17, 2015, and a settlement was not reached. A preliminary hearing for arbitration was held on September 18, 2015,and a final hearing commenced on April 25, 2016. A Scheduling Order was entered and depositions and discovery were to be completed by March 25, 2016.A hearing was held on March 2, 2016 where the arbitrator granted Respondents’ request to file a motion for summary judgment and granting the Companyuntil March 21, 2016 to issue its response. The arbitrator also granted the Company’s motion to compel the Respondents to produce the customer list for Mr.Caster’s former company, EM Squared. The arbitrator further ordered that each party will be limited to 12 fact depositions and denied Respondents requestfor reconsideration of the arbitrator’s ruling denying advancement of fees to the Respondents. The Company filed its response to Respondents’ Motion forSummary Judgment on March 21, 2016. The arbitration hearing was scheduled to begin on August 29, 2016; however, both parties reached a settlementagreement, and on August 25, 2016 the arbitrator entered the Agreed Order of Dismissal, dismissing all claims with prejudice. This matter is closed.Trademark Opposition - U.S. Patent and Trademark OfficeUnited States Trademark Opposition No. 91221493, Shaklee Corporation v. Mannatech, Incorporated re: UTHOn April 15, 2015, the Company received notice that Shaklee Corporation (“Shaklee”) filed a Notice of Opposition to the Company’s trademarkapplication for UTH (stylized as Û th) with the USPTO. On May 19, 2015, the Company filed an answer to the opposition and also filed a counterclaimseeking to cancel Shaklee’s registration of its YOUTH mark. Shaklee filed an extension to oppose the UTH mark on June 18, 2015, and the request to extendtime to oppose was granted until July 18, 2015. Shaklee filed a second extension on July 17, 2015, and the request to extend time to oppose was granteduntil September 16, 2015. Shaklee filed motions to strike the Company’s Affirmative Defenses to the Opposition and Counterclaim to cancel theirregistrations. The Company filed responses and the Trademark Trial and Appeal Board (“TTAB”) ruled in Shaklee’s favor. The Company filed an amendedAnswer to the Opposition and Amended Counterclaim on November 18, 2015. Shaklee then filed an answer to the Company’s Counterclaim on December 30,2015.On September 15, 2015, Shaklee filed two more Notices of Opposition for the UTH & Design and ÛTH applications. The Company filed Answersand Counterclaims on November 20, 2015. On January 25, 2016, the Company filed a motion to strike Shaklee’s affirmative defense on cancellation. On May17, 2016, the TTAB granted the Company’s motion to strike Shaklee’s affirmative defense on cancellation. On August 9, 2016, Shaklee filed a Motion forSummary Judgment on the Company’s cancellation filing of its YOUTH mark stating that their mark is in use and they have not abandoned their rights. OnSeptember 9, 2016, the Company filed a Motion for Request for Discovery to Respond to Summary Judgment under Rule 56(d) stating that the Companycannot respond without sufficient information due to lack in discovery. On September 28, 2016, Shaklee filed a response to the Company’s motion to cancelthe request for discovery. The Company filed a response in support of the motion under Rule 56(d) on October 18, 2016. On December 22, 2016, the TTABrequested the Company to send copies of the request for discovery to Shaklee by January 6, 2017. Upon receipt of those documents, the TTAB will rule onthe Rule 56(d) motion and the Company will then answer Shaklee’s Motion for Summary Judgment. The case remains suspended pending the ruling on themotion under Rule 56(d).It is not possible at this time to predict the outcome of this office action or whether the Company will incur any liability, or to estimate the ranges ofdamages, if any, which may be incurred in connection with this matter. However, the Company believes it has a valid defense and will vigorously defend thisclaim. This matter remains open.F-29Table of ContentsLitigation in GeneralThe Company has incurred several claims in the normal course of business. The Company believes such claims can be resolved without any materialadverse 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 itsinsurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or inpart. 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’sestimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment.NOTE 14: SHAREHOLDERS’ EQUITYPreferred StockOn May 19, 1998, the Company amended its Amended and Restated Articles of Incorporation to reduce the number of authorized shares of commonstock 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 ofpreferred stock have ever been issued or outstanding.Treasury StockOn 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 ofits 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, inthe 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, theCompany’s Board of Directors authorized the Company to reactivate the June 2004 Plan. On August 31, 2016, the Company's Board of Directors reactivatedthe August 2006 Plan and authorized the Company to repurchase up to $0.5 million of the Company's outstanding common shares in open markettransactions. As of March 14, 2017, the maximum number of shares available for repurchase under the June 2004 Plan was 19,084, and the total number ofshares purchased in the open market under the June 2004 Plan was 112,672. As of March 14, 2017, there was $19.7 million remaining for repurchase underthe August 2006 Plan, and the total value of shares repurchased in the open market under the August 2006 Plan was $0.3 million. The Company does nothave any stock repurchase plans or programs other than the June 2004 Plan and the August 2006 Plan.During the year ended December 31, 2016, the Company repurchased 15,697 shares at an average price of $17.28.F-30Table of ContentsEquity-Based CompensationDuring 2016, 7,001 shares were issued for stock option exercises and a total of 12,908 shares were issued to the members of the Board ascompensation for their work on the Board.Accumulated Other Comprehensive IncomeAccumulated other comprehensive income displayed in the Consolidated Statements of Shareholders’ Equity represents the results of certainshareholders’ equity changes not reflected in the consolidated statements of operations, such as foreign currency translation and certain pension andpostretirement benefit obligations.The after-tax components of accumulated other comprehensive income , are as follows (in thousands): ForeignCurrencyTranslation PensionPostretirementBenefitObligation AccumulatedOtherComprehensiveIncome, NetBalance as of December 31, 2015$358 $328 $686Current-period change before reclassifications1,176 — 1,176Amounts reclassified from accumulated other comprehensive income (loss)— (43) (43)Income tax benefit— 15 15Balance as of December 31, 2016$1,534 $300 $1,834DividendsOn August 11, 2016, the Board of Directors declared a dividend of $0.125 per share that was paid on September 21, 2016 to shareholders of recordon August 31, 2016.On November 10, 2016, the Board of Directors declared a dividend of $0.125 per share that was paid on December 21, 2016 to shareholders of recordon November 30, 2016. During the year ended December 31, 2016, the Company paid dividends amounting to an aggregate of $0.7 million. For the year ended December31, 2015, the Company paid no dividends. Payment of future dividends is at the discretion of our Board of Directors.NOTE 15: EARNINGS PER SHARE The Company calculates basic Earnings per Share ("EPS") by dividing net income (loss) by the weighted-average number of common sharesoutstanding for the period. Diluted EPS also reflects the potential dilution that could occur if common stock were issued for awards outstanding under the2008 Stock Incentive Plan. In determining the potential dilution effect of outstanding stock options during the year ended December 31, 2015, the Companyused the annual average common stock close price of $20.17 per share. For the year ended December 31, 2015, approximately 0.1 million of the Company'sstock options were excluded from the diluted EPS calculation as the effect would have been antidilutive. For the year ended December 31, 2016, shares of theCompany's stock subject to options were excluded from the diluted EPS calculation as their effect would have been antidilutive. The Company reported a netloss for the year ended December 31, 2016.F-31Table of ContentsNOTE 16: SEGMENT INFORMATIONThe Company's primary operating and sole reporting segment is one where we sell proprietary nutritional supplements, skin care and anti-agingproducts, and weight-management and fitness products through network marketing distribution channels operating in twenty-five countries. Each of thebusiness units sells similar packs and products and possesses similar economic characteristics, such as selling prices and gross margins. In each country, theCompany markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financialinformation by country and focuses its internal reporting and analysis of revenues by packs and product sales. The Company sells its products through itsindependent associates who occupy positions in our network and distribute products through similar distribution channels in each country. No singleindependent associate has ever accounted for more than 10% of the Company’s consolidated net sales. The Company also operates a non-direct sellingbusiness in mainland China. Our subsidiary in China, Meitai is operating as a traditional retailer under a cross-border e-commerce model. Meitai cannotlegally conduct a direct selling business in China until it acquires a direct selling license in China.The Company operates facilities in fourteen countries and sells product in twenty-six countries around the world. These facilities are located in theUnited States, Canada, Switzerland, Australia, the United Kingdom, Japan, the Republic of Korea (South Korea), Taiwan, South Africa, Mexico, Hong Kong,Singapore, Colombia and China. Each facility services different geographic areas. We currently sell our products in three regions: (i) the Americas (the UnitedStates, Canada, Colombia and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, theNetherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea,Singapore, Taiwan, Hong Kong and China).F-32Table of ContentsConsolidated net sales shipped to customers in these regions, along with pack and product information for the years ended December 31, are asfollows (in millions, except percentages):Region2016 2015Americas$70.2 38.9% $73.3 40.7%Asia/Pacific96.2 53.4% 91.4 50.7%EMEA13.9 7.7% 15.6 8.6%Total$180.3 100.0% $180.3 100.0% 2016 2015Consolidated product sales$148.6 $143.1Consolidated pack sales26.7 31.7Consolidated other, including freight5.0 5.5Total$180.3 $180.3Long-lived assets by region, which include property and equipment and construction in progress for the Company and its subsidiaries, as ofDecember 31, reside in the following regions, as follows (in millions):Region2016 2015Americas$3.1 $3.5Asia/Pacific1.4 1.1EMEA0.1 0.1Total$4.6 $4.7Inventory balances by region, which consist of raw materials, and finished goods, including promotional materials, and offset by obsolete inventories, for theCompany and its subsidiaries, reside in the following regions as of December 31, as follows (in millions):Region2016 2015Americas4.8 3.4Asia/Pacific4.2 4.3EMEA3.0 1.5Total$12.0 $9.2F-33Table of ContentsINDEX TO EXHIBITS Incorporated by ReferenceExhibitNumberExhibit DescriptionForm File No. Exhibit (s) Filing Date3.1Amended and Restated Articles of Incorporation of Mannatech, datedMay 19, 1998.S-1 333-63133 3.1 October 28, 19983.2Amendment to the Amended and Restated Articles of Incorporation ofMannatech, dated January 13, 2012.8-K 000-24657 3.1 January 17, 20123.3Fifth Amended and Restated Bylaws of Mannatech, effective August25, 2014.8-K 000-24657 3.1 August 27, 20144.1Specimen Certificate representing Mannatech’s common stock, parvalue $0.0001 per share.S-1 333-63133 4.1 October 28, 199810.1Amended and Restated 1997 Stock Option Plan, dated August 7,2004.10-K 000-24657 10.1 March 15, 200410.22008 Stock Incentive Plan, as amended.S-8 333-197400 4.4 July 14, 201410.3Investment Agreement by and between Mannatech and DutchessOpportunity Fund, II, LP dated September 16, 2010.8-K 000-24657 10.1 September 21, 201010.4Amendment to Investment Agreement, dated as of October 4, 2010, byand between Mannatech and Dutchess Opportunity Fund, II, LP.8-K 000-24657 10.1 October 5, 201010.5Amended and Restated 1998 Incentive Stock Option Plan, datedAugust 7, 2004.10-K 000-24657 10.1 March 15, 200410.6Registration Rights Agreement by and between Mannatech andDutchess Opportunity Fund, II, LP dated September 16, 2010.8-K 000-24657 10.2 September 21, 201010.7Amended and Restated 2000 Option Plan, dated August 7, 2004.10-K 000-24657 10.1 March 15, 200410.8Form of Indemnification Agreement between Mannatech and eachmember of the Board of Directors of Mannatech Korea Ltd., datedMarch 3, 2004.10-Q 000-24657 10.2 August 9, 200410.9Form of Indemnification Agreement between Mannatech and each ofthe following directors: J. Stanley Fredrick, Patricia Wier, Alan D.Kennedy, Gerald E. Gilbert, Marlin Ray Robbins, Larry A. Jobe, andRobert A. Toth.10-Q 000-24657 10.4 November 4, 201010.10Commercial Lease Agreement between Mannatech and MEPCQuorum Properties II Inc., dated November 7, 1996, as amended bythe First Amendment thereto dated May 29, 1997 and the SecondAmendment thereto dated November 13, 1997.S-1 333-63133 10.13 September 10, 199810.11Second Amendment to the Commercial Lease Agreement betweenMannatech and Texas Dugan Limited Partnership, dated September22, 2005.10-Q 000-24657 10.1 November 9, 200510.12Commercial Lease Agreement between Mannatech and MEPCQuorum Properties II Inc., dated May 29, 1997 as amended by theFirst Amendment thereto dated November 6, 1997.S-1 333-63133 10.14 September 10, 199810.13Third Amendment to the Commercial Lease Agreement betweenMannatech and Texas Dugan Limited Partnership, dated September22, 2005.10-Q 000-24657 10.2 November 9, 200510.14Trademark License and Supply Agreement between Mannatech andCarrington Laboratories, Inc., dated January 25, 2007. (Portions ofthis exhibit were omitted pursuant to a confidential treatment requestsubmitted pursuant to Rule 24b-2 of the Exchange Act.)8-K 000-24657 10.1 January 31, 2007F-34Table of Contents Incorporated by ReferenceExhibitNumberExhibit DescriptionForm File No. Exhibit (s) Filing Date10.15Supply Agreement between Mannatech and Natural Aloe de CostaRica, S.A. dated April 1, 2012 (Portions of this exhibit were omittedpursuant to a confidential treatment request submitted pursuant toRule 24b-2 of the Exchange Act.)8-K 000-24657 10.1 May 3, 201110.16Supply Agreement between Mannatech (International) Limited andMarinova Pty. Limited, effective August 9, 2007 and dated May 7,2007. (Portions of this exhibit were omitted pursuant to a confidentialtreatment request submitted pursuant to Rule 24b-2 of the ExchangeAct.)10-Q 000-24657 10.3 May 10, 200710.17Amendment to Purchase Agreement between Mannatech andMarinova PTY, Limited, dated May 6, 2008. (Portions of this exhibitwere omitted pursuant to a confidential treatment request submittedpursuant to Rule 24b-2 of the Exchange Act.)10-Q 000-24657 10.4 August 11, 200810.18Purchase Agreement between Mannatech and Larex, Inc., datedJanuary 1, 2006. (Portions of this exhibit were omitted pursuant to aconfidential treatment request submitted pursuant to Rule 24b-2 ofthe Exchange Act.)10-K 000-24657 10.18 March 16, 200610.19Purchase Agreement between Mannatech and Wellness Enterprises,LLC, dated February 1, 2006. (Portions of this exhibit were omittedpursuant to a confidential treatment request submitted pursuant toRule 24b-2 of the Exchange Act.)10-K 000-24657 10.19 March 16, 200610.20Supply Agreement between Mannatech and Coradji PTY. Limited,dated March 29, 2004. (Portions of this exhibit were omitted pursuantto a confidential treatment request submitted pursuant to Rule 24b-2of the Exchange Act.)10-Q/A 000-24657 10.1 March 29, 200510.21Supply License Agreement between Mannatech andInB:Biotechnologies, Inc., dated March 22, 2006. (Portions of thisexhibit were omitted pursuant to a confidential treatment requestsubmitted pursuant to Rule 24b-2 of the Exchange Act.)10-Q 000-24657 10.2 May 10, 200610.22Initial Commercial Supply and Manufacturing Agreement betweenMannatech and Fine Chemetics, Inc., dated March 29, 2006. (Portionsof this exhibit were omitted pursuant to a confidential treatmentrequest submitted pursuant to Rule 24b-2 of the Exchange Act.)10-Q 000-24657 10.3 May 10, 200610.23Supply Agreement between Mannatech, Incorporated, and ImproveU.S.A., Inc., effective June 1, 2008, and executed May 2, 2008.(Portions of this exhibit were omitted pursuant to a confidentialtreatment request submitted pursuant to Rule 24b-2 of the ExchangeAct.)8-K 000-24657 10.1 May 8, 200810.24Amendment to Supply Agreement between Mannatech and ImproveU.S.A., dated June 1, 2011. (Portions of this exhibit were omittedpursuant to a confidential treatment request submitted pursuant toRule 24b-2 of the Exchange Act.)8-K 000-24657 10.1 August 22, 201110.25Services Agreement by and between Integrated Distribution andLogistics Direct, LLC and Mannatech dated July 2, 2012 (Portions ofthis exhibit were omitted pursuant to a confidential treatment requestsubmitted pursuant to Rule 24b-2 of the Exchange Act.)8-K 000-24657 10.1 July 9, 2012F-35Table of Contents Incorporated by ReferenceExhibitNumberExhibit DescriptionForm File No. Exhibit (s) Filing Date10.26Sublease by and between Integrated Distribution and Logistics Direct,LLC and Mannatech, dated July 2, 2012. (Portions of this exhibitwere omitted pursuant to a confidential treatment request submittedpursuant to Rule 24b-2 of the Exchange Act.)8-K 000-24657 10.2 July 9, 201210.27Amended and Restated Employment Agreement between Terry L.Persinger and Mannatech, dated June 16, 2008.8-K 000-24657 10.1 June 20, 200810.28Employment Agreement between Robert A. Sinnott, Ph.D. andMannatech, dated October 5, 2007.8-K 000-24657 10.3 October 11, 200710.29Employment Agreement between Mannatech and Mr. Samuel L.Caster, dated January 23, 2006.10-K 000-24657 10.32 March 16, 200610.30Employment Agreement between Stephen D. Fenstermacher andMannatech, dated October 5, 2007.8-K 000-24657 10.2 October 11, 200710.31First Amendment to Employment Agreement between Stephen D.Fenstermacher and Mannatech, dated December 18, 2008.10-K 000-24657 10.24 March 12, 200910.32Mutual Severance and Release Agreement by and between Stephen D.Fenstermacher and Mannatech, dated March 12, 201210-Q 000-24657 10.1 May 10, 201210.33Employment Agreement between Terence L. O’Day and Mannatech,dated October 5, 2007.8-K 000-24657 10.1 October 11, 200710.34Employment Agreement between B. Keith Clark and Mannatech,dated October 5, 2007.8-K 000-24657 10.4 October 11, 200710.35Employment Agreement between Wayne L. Badovinus andMannatech, dated June 4, 2008.8-K 000-24657 10.1 June 9, 200810.36Employment Agreement between Terri F. Maxwell and Mannatech,dated August 28, 2008.8-K 000-24657 10.1 September 2, 200810.37Lock-up Agreement between Mannatech and J. Stanley Fredrick,dated November 6, 2003.10-K 000-24657 10.36 March 15, 200410.38Termination of Lock-up Agreement between Mannatech and J.Stanley Fredrick, dated March 6, 2009.8-K 000-24657 10.1 March 10, 200910.39Follow-Up Agreement to Letter of Intent Agreement betweenMannatech and Jett, dated September 10, 2001.10-Q 000-24657 10.4 November 14, 200110.40Letter of Understanding between Mannatech and Dr. John Axford,dated April 19, 2006.8-K 000-24657 99.1 April 21, 200610.41Extension of the Letter of Spokesperson Arrangement betweenMannatech and Dr. John Axford, dated February 18, 2007.8-K 000-24657 99.1 February 21, 200710.42Employment Agreement between Alfredo Bala and Mannatech,effective October 1, 2007, dated September 18, 2007.8-K 000-24657 10.1 September 24, 200710.43Amendment to Employment Agreement between Alfredo Bala andMannatech, dated October 11, 2007.8-K 000-24657 10.1 October 17, 200710.44Clinical Research Agreement dated January 3, 2007 by and betweenSt. George’s Hospital Medical School (trading as St George’s,University of London), and Mannatech, Inc.10-K 000-24657 10.39 March 17, 200810.45Employment Agreement, effective March 2, 2009, by and betweenMannatech and Randy S. Bancino.8-K 000-24657 10.1 March 6, 200910.46First Amendment to Employment Agreement, dated as of December16, 2009, by and between Mannatech and Randy S. Bancino.8-K 000-24657 10.4 December 18, 2009F-36Table of Contents Incorporated by ReferenceExhibitNumberExhibit DescriptionForm File No. Exhibit (s) Filing Date10.47Consulting Agreement, dated March 17, 2009, between Mannatechand Salinda Enterprises, LLC and Samuel L. Caster.8-K 000-24657 10.1 March 19, 200910.48Consulting Agreement, dated December 1, 2011, by and betweenMannatech and WonderEnterprises, LLC (f/k/a Salinda Enterprises,LLC) and Samuel L. Caster.10-K 000-24657 10.46 March 29, 201210.49Consulting Agreement, effective January 1, 2013, by and betweenMannatech and WonderEnterprises, LLC and Samuel L. Caster, datedMarch 6, 2013.10-K 000-24657 10.51 March 28, 201310.50Consulting Agreement, effective June 1, 2013, by and betweenMannatech and WonderEnterprises, LLC and Samuel L. Caster, datedJune 3, 2013.8-K 000-24657 10.1 June 4, 201310.51Consulting Agreement, effective as of December 1, 2013, by andbetween Mannatech and WonderEnterprises, LLC.8-K 000-24657 10.1 December 1, 201310.52Separation and Release Agreement, dated July 17, 2009 betweenMannatech and Terri F. Maxwell.8-K 000-24657 10.1 July 21, 200910.53Second Amendment to Employment Agreement, dated as of December16, 2009, by and between Mannatech and Stephen D. Fenstermacher.8-K 000-24657 10.1 December 18, 200910.54Second Amendment to Employment Agreement, dated as of December16, 2009, by and between Mannatech and Robert A. Sinnott, Ph.D.8-K 000-24657 10.2 December 18, 200910.55Second Amendment to Employment Agreement, dated as of December16, 2009, by and between Mannatech and B. Keith Clark.8-K 000-24657 10.3 December 18, 200910.56Separation Agreement and Release, dated March 20, 2013, by andbetween Mannatech and B. Keith Clark.8-K 000-24657 10.1 March 25, 201310.57Employment Agreement, dated March 4, 2013, by and betweenMannatech and Roy Truett.8-K 000-24657 10.1 March 6, 201310.58Separation Agreement and General Release, dated January 30, 2014,by and between Mannatech and Roy Truett.10-K 000-24657 10.60 March 18, 201410.59Executive Service Agreement between Mannatech Korea, Ltd. andYong Jae (Patrick) Park, dated October 1, 2009.10-Q 000-24657 10.1 May 12, 201510.60First Amendment to Employment Agreement between MannatechIncorporated and Robert A. Sinnott, MNS, PhD, dated December 18,2008.10-Q 000-24657 10.2 May 12, 201510.61Supply Agreement between Natural Aloe de Costa Rica, S.A. andMannatech, dated as of November 22, 2016 (portions of this exhibitwere omitted pursuant to a confidential treatment request submittedpursuant to Rule 24b-2 of the Exchange Act)* * * *14.1Code of Ethics.10-K 000-24657 14.1 March 16, 200721*List of Subsidiaries.* * * *23.1*Consent of BDO USA, LLP.* * * *23.2*Report of Independent Registered Public Accounting Firm onFinancial Statement Schedule.* * * *24*Power of Attorney, which is included on the signature page of thisannual report on Form 10-K.* * * *31.1*Certification pursuant to Section 302 of the Sarbanes-Oxley Act of2002, of the Chief Executive Officer of Mannatech.* * * *F-37Table of Contents Incorporated by ReferenceExhibitNumberExhibit DescriptionForm File No. Exhibit (s) Filing Date31.2*Certification pursuant to Section 302 of the Sarbanes-Oxley Actof 2002, of the Chief Financial Officer of Mannatech.* * * *32.1*Certification pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, of the Chief Executive Officer of Mannatech.* * * *32.2*Certification pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, of the Chief Financial Officer of Mannatech.* * * *99.1*Financial Statement Schedule Regarding Valuation andQualifying Accounts.* * * *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.F-38Exhibit 10.61SUPPLY AGREEMENT1 THIS SUPPLY AGREEMENT (this “Agreement”) is dated this 22nd day of November, 2016 (the “Effective Date”) and is between Natural Aloe de CostaRica, S.A., a Costa Rican corporation (“Supplier”), and Mannatech, Incorporated, a Texas corporation (“Mannatech”). Collectively, Supplier and Mannatechare sometimes referred to herein individually as a “Party” and collectively as the “Parties.”RECITALSWHEREAS, Mannatech develops and sells proprietary dietary supplements and skin care products through a network marketing system of independentdistributors throughout the United States, Canada, Colombia, Mexico, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic ofIreland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden, the United Kingdom, Australia, Japan, New Zealand, the Republic of Korea,Singapore, Taiwan, Hong Kong, and other countries as it expands its business internationally;WHEREAS, Supplier is a manufacturer of [***]1, bulk aloe vera mucilaginous polysaccharide powder in whole leaf Aloe form (referred to as, “Hi Fi” and/or[***]1) and aloe vera gel extract (referred to as, “Manapol” and/or [***]1). Specifications for these products are listed in Exhibit A.WHEREAS, Supplier desires to sell to Mannatech and Mannatech desires to purchase from Supplier, Manapol and Hi Fi upon the terms and conditions setforth herein.AGREEMENTNOW, THEREFORE, in consideration of the premises, the respective representations, warranties, covenants and agreements contained herein, and othergood and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties agree asfollows:1. Term. The initial term of this Agreement is for four (4) years commencing on the Effective Date and will automatically renew for additional two (2) yearperiods (“Extension Period”) unless either party provides written notice to the other party no later than six (6) months prior to the then current periodexpiring.2. Sale and Purchase. Subject to the terms and conditions of this Agreement, Supplier agrees to sell to Mannatech (and/or its subsidiary and /or itsmanufacturer designee (hereinafter each considered a “Designee”)) and Mannatech (and/or its Designee) agrees to purchase from Supplier, Manapol and/or HiFi meeting the Mannatech specifications (the “Specifications”) set forth in the Quality Specifications found in Exhibit A, which is attached hereto and madea part of this Agreement. Hi Fi meeting these Specifications will appear on the label of certain Mannatech products as required by various local andinternational regulations. MANAPOL® is a registered trademark of Mannatech.3. Pricing.(a) During the Term, the price per kilogram payable by Mannatech or its Designee to Supplier for Manapol or Hi Fi shall be based on the pricingschedule set forth in Exhibit B, which is attached hereto and made a part of this Agreement, subject to the 6-month adjustments as set forth below.(b) Mannatech or Designee, shall bear all, insurance and similar costs, freight, duties and all sales taxes, with respect to such purchases. The purchaseprice of Manapol and/or Hi Fi, together with all related freight, insurance and similar costs, and sales taxes, shall be paid by Mannatech asappropriate to Supplier within:(i) thirty (30) days after the date of invoice for the first year of the Term; provided that the purchase price shall be discounted by 1.5% if thepurchase price is paid within fifteen (15) days from the date of the applicable invoice; and(ii) Forty-five (45) days after the date of invoice for the second year of the Term and any Extension Period thereafter; provided that thepurchase price shall be discounted by 1.5% if the purchase price is paid within fifteen (15) days from the date of the applicable invoice.1The appearance of [***] denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to aconfidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.(c) In the event the Term is extended pursuant to Section 1, the Parties shall negotiate in good faith to agree, at least six (6) months prior to the endof the Term, upon an amended Exhibit B which will set forth the pricing terms of the renewal period.(d) Each six (6) months, during the Term or any renewal period, price adjustments may be considered by the Parties, allowing for price increases ordecreases based on the justification of actual cost changes experienced by the Supplier. Costs tracked and considered are energy/electricity, fuel,ethanol and labor. The breakdown of Supplier’s baseline costs for energy/electricity, fuel, ethanol, and labor for the most recent period of twelve (12)consecutive months commencing with October 2015 and continuing through October 2016 (collectively the “Baseline Cost”). The Baseline Costtable is included in Exhibit B. The Baseline Cost will serve as the baseline upon which 6-month adjustments may be reviewed, discussed, andconsidered for a price adjustment. Beginning on the effective date, and continuing on June 30th, and December 31st, of each year of the agreement,Supplier shall provide Mannatech with documentation as shown in Exhibit B for its current baseline cost for energy/electricity, fuel, ethanol andlabor. If either party chooses to use this documentation to propose and request a price adjustment, then both parties agree to review the data andnegotiate in good faith, within a 30-day period after all relevant data has been presented, for an appropriate price adjustment.4. Orders; Deliveries.(a) Each order for Manapol and/or Hi Fi under this Agreement shall be made by Mannatech or its Designee pursuant to a written purchase orderexecuted by Mannatech or its Designee and delivered to Supplier (a “Purchase Order”) at least thirty (30) days in advance of the date it desiresManapol and/or Hi Fi to be delivered to it hereunder. The parties acknowledge that additional lead time may be required if the requested volume ina calendar quarter in 2017 or 2018 exceeds Mannatech’s quarterly volume requirements by forty percent or more. The parties will agree in advanceto the amount of lead time needed for such quarterly order volume. Each Purchase Order shall specify: (i) the quantities of Manapol and/or Hi Fi tobe delivered; (ii) the price; (iii) the specific date of delivery; (iv) the specific location of delivery; (v) the particular carrier or particular type of carrierfor such delivery; and (vi) any other specification with which Supplier must comply. To the extent the terms and conditions of any such PurchaseOrder are inconsistent with the terms of this Agreement, the terms of this Agreement shall prevail unless the Parties otherwise expressly agree inwriting.(b) Supplier shall acknowledge and accept in writing within five (5) business days of receipt (or will be deemed to have done so in the event it doesnot do so), without exception or modification, each Purchase Order submitted by Mannatech meeting the requirements of Section 4(a) above. Forpurposes of this Agreement, the term “business days” means Monday through Friday excluding the federal, state, and/or other business holidays ofeach Party.(c) The Parties agree that a Purchase Order and the Supplier’s acceptance may be delivered via facsimile or electronic mail to a designated authorizedrepresentative of the respective Party. The sending party shall keep a contemporaneous record of such communications and shall verify receipt bythe other party.(d) Deliveries of Manapol and/or Hi Fi shall be made by Supplier under normal trade conditions in the usual and customary manner being utilizedby Supplier at the time and location(s) for the particular delivery. Manapol and/or Hi Fi delivered hereunder shall be packaged in five (5) kilogramcontainers. All deliveries of Manapol and/or Hi Fi hereunder shall be EXW. Supplier may deliver Manapol and/or Hi Fi to Mannatech or Designee atSuppliers´ facilities provided that Mannatech or its Designee shall bear all risk, insurance and freight costs once Manapol and/or Hi Fi leaveSuppliers´ facilities, unless otherwise negotiated and agreed upon by Mannatech and Supplier.5. Forecast. By the end of each calendar quarter during the Term, Mannatech shall provide Supplier with a non-binding twelve (12) month rolling forecast ofthe desired quantities of Manapol and/or Hi Fi by volume and date (the “Forecast”), provided that such Forecast must comply with the minimum purchaseobligations contained in Exhibit B. The first Forecast shall be provided by Mannatech no later than the first day of the Term, with subsequent Forecastupdates due on or before the end of each calendar quarter thereafter throughout the Term and during the Extension Period(s), if applicable; provided thatMannatech shall have the ability (but not the obligation) to provide Supplier with updated Forecasts at any time. Without waving or limiting in any mannerthe minimum purchase obligations for Mannatech contained in Exhibit B, the Parties acknowledge and agree that the Forecast is non-binding and is merelyfor the sole purpose of assisting the Parties in the planning of scale-up activities related to Manapol and/or Hi Fi.6. Certain Covenants.(a) Supplier acknowledges and agrees that the MANAPOL mark is a registered trademark of Mannatech and that Supplier shall produce Manapol tothe Specifications contained in Exhibit A for commercialization exclusively by Mannatech under the MANAPOL mark. Supplier shall not:(i) use, market, or otherwise distribute any product under the name of, “Manapol Powder” or “Manapol” to any party other than Mannatechor its Designee, without the prior written consent of Mannatech; and(ii) use the “Mannatech, Incorporated” name, MANNATECH mark, AMBROTOSE mark, ADVANCED AMBROTOSE mark, MANAPOLmark or any other trademark, logo, design, name, or form of trade dress owned by Mannatech to sell, market, or otherwise distribute any ofSupplier’s products.The Parties shall not combine Manapol with any product or substance in any manner which would violate any laws, rules or regulations of any state,federal or other governmental body in which Manapol, or any product derived from or containing Manapol (the “Manufactured Products”) are sold.The Parties shall not combine Manapol with any other substance in a Manufactured Product that is to be advertised or sold for use or consumptionby humans or animals if the approval of the U.S. Food and Drug Administration (the “FDA”) or the U.S. Department of Agriculture (“USDA”) forsuch use or consumption is required and has not been obtained.For a period of at least seven (7) years from the date of shipment (or for such longer period if requested by Mannatech and agreed to by Supplier),Supplier agrees to keep complete records regarding the manufacture, storage, shipment and sale of Manapol and/or Hi Fi for and to Mannatech andupon ten (10) days’ prior written request by Mannatech, to make these records available to Mannatech for its review and inspection.(b) Mannatech acknowledges and agrees that “Natural Aloe de Costa Rica,” “Verapol,” and “Naturmanan” are registered trademarks of Supplier andthat Mannatech shall not use these marks or any other trademark, logo, design, name, or form of trade dress owned by Supplier to sell, market, orotherwise distribute any of Mannatech’s products. Mannatech shall not:.(i) use, market, or otherwise distribute any product under the name of, “Natural Aloe de Costa Rica,” “Verapol,” and “Naturmanan”.(ii) use the “Natural Aloe de Costa Rica S.A.” name, Natural Aloe de Costa Rica,” “Verapol,” and “Naturmanan” mark or any othertrademark, logo, design, name, or form of trade dress owned by Supplier to sell market, or otherwise distribute any of Mannatech’s products.7. Exclusivity.( a) Manapol [***]1. Supplier will exclusively sell Manapol, [***]1, to Mannatech and further grants to Mannatech the exclusive right to market andsell Manapol and/or products containing Manapol as an ingredient, provided that Mannatech is, at all times, under compliance with the full termsand conditions of this Agreement, including the quarterly minimum purchase obligations for Mannatech contained in Exhibit B. The exclusivitywill apply to all channels of distribution throughout the world, including by way of example and not intending to be exhaustive, all online retailoutlets and social media platforms, all brick and mortar retail outlets, all direct selling channels (network marketing, multi-level marketing, partyplan sales, and affiliate sales), and other direct to consumer sales channels. [***]1.1 Denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to a confidential treatmentrequest under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.(b) Hi Fi ([***]1). For an initial period of [***]1 Supplier grants to Mannatech the exclusive right to market and sell Hi Fi and/or products with Hi Fias an ingredient solely throughout the worldwide direct selling retail channel of distribution which includes, by way of example, multi-levelmarketing, party plan, and network marketing, provided that Mannatech is, at all times, under compliance with the full terms and conditions of thisAgreement. This exclusivity term may be extended, only pursuant to the terms and conditions set forth in Exhibit B. To clarify, the term “multi-levelmarketing” or “network marketing” means a strategy in which the sales force is compensated not only for sales they generate, but also for the sales ofthe other salespeople they recruit. Examples of multi-level marketing and network marketing businesses include, but are not limited to, Arogalife,RBC Life Sciences, Advocare, Evolve, Herbalife, Amway, Visalus, Shaklee, and Nature’s Sunshine. The term “party plan” means selling throughexplanation and demonstration of products to a group of prospective customers by a direct seller distributor, usually in the home of a host/hostesswho has invited other people for that purpose. It has a “party” atmosphere as there are typically refreshments served and has a social aspect to it.Examples of party plan businesses include, but are not limited to, Blythe (Party Lite), Tastefully Simple, Scentsy, 31 Gifts, and Wineshop at Home.The exclusivity granted in this section 7 (b) will apply solely to the direct selling channel distribution methods such as multi-level marketing, partyplan, and network marketing, as defined in this section 7 (b) and under no circumstances will it apply to any other channels of distribution,including by way of example and not intending to be exhaustive, online wholesale/retail companies like FunctionRX (via Amazon.com),ABHealthShop (via Amazon.com), and AloEssence.com. [***]1 8. Supplier Representations and Warranties.(a) Supplier warrants and represents the following to Mannatech.(i) Manapol and Hi Fi will be delivered on the schedule set forth by Mannatech or its Designee in its Purchase Order provided suchproposed delivery date was set forth in a Purchase Order accepted (or deemed accepted) by Supplier in accordance with Section 4(b).(ii) All Manapol and Hi Fi sold and delivered by Supplier pursuant to this Agreement will:(A) conform to the quality Specifications set forth in Exhibit A to this Agreement, which is attached hereto and incorporated byreference herein;(B) be formulated, manufactured, stored, tested, labeled, and shipped in accordance with current good manufacturing practices aspromulgated by the FDA and all other applicable laws and regulations, unless non-compliance with FDA’s rules and regulations iscaused by following Mannatech’s Specifications; and(C) not be (1) adulterated or misbranded by Supplier within the meaning of the Food, Drug & Cosmetic Act (“FD&C Act”), (2) anarticle that may not be introduced into interstate commerce under the FD&C Act, or (3) an article that fails to comply with any orall applicable laws and regulations.(iii) Supplier’s facilities have been adequately designed, qualified, and maintained and that it has any and all appropriate licenses, permits,and authorizations from all applicable federal, state, and local authorities such that it may carry out its obligations under this Agreement.(iv) Supplier has received due authorization to execute this Agreement and comply with the obligations herein, by the appropriategovernance bodies of the Supplier, including its Board of Directors.(v) The execution, delivery and performance by Supplier of this Agreement and the performance by Supplier of the transactionscontemplated hereby does not, with or without the giving of notice or the passage of time or both, violate, conflict with or cause a breach ortermination of or constitute a default under: (A) the provisions of any laws applicable to Supplier or its properties or assets; (B) theprovisions of the constituent organizational documents or other governing instruments of Supplier; (C) any note, bond, mortgage,indenture, license, agreement or other instrument or obligation to which Supplier is a party or by which it is bound or subject; or (D) anyjudgment, decree, order or award of any court or any supranational, national, federal, state, provincial or local judicial, legislative,executive or regulatory authority applicable to Supplier or its properties or assets.(vi) There is no pending, or to Supplier’s knowledge threatened, any action, claim, suit, litigation, arbitration, investigation, notification,audit or other proceeding (“Proceedings”) against Supplier, except for such Proceedings which would not, individually or in the aggregate,have a material adverse effect on the ability of Supplier to perform its obligations hereunder.1 Denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to a confidential treatmentrequest under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.(vii) Supplier possesses and has continuously maintained all permits, authorizations and licenses issued by any supranational, national,federal, state, provincial or local judicial, legislative, executive or regulatory authority necessary for the conduct of Supplier’s business,except where the failure to possess or maintain such permits,authorizations and licenses would not, individually or in the aggregate, have a material adverse effect on the ability of Supplier to performits obligations hereunder.(viii) Supplier has the financial ability necessary to perform its obligations hereunder.(b) Mannatech warrants and represents the following to Supplier(i) Mannatech is legally entitled to provide the Specifications for production of Manapol as established in Exhibit A of this Agreement.(ii) The Specifications provided by Mannatech are in accordance with federal rules and regulations and all applicable laws and regulations.Mannatech shall hold Supplier harmless of any responsibility for Mannatech’s violation of this paragraph.(iii) Mannatech has received due authorization to execute this Agreement and comply with the obligations herein, by the appropriategovernance bodies of Mannatech, including its Board of Directors.(iv) The execution, delivery and performance by Mannatech of this Agreement and the performance by Mannatech of the transactioncontemplated hereby, does not, with or without the giving of notice or the passage of time or both, violate, conflict with or cause a breachor termination of or constitute a default under: (A) the provisions of any laws applicable to Mannatech or its properties or assets; (B) theprovisions of any organizational documents or other governing instruments of Mannatech; (C) any note, bond, mortgage, indenture,license, agreement or other instrument or obligation to which Mannatech is a party or by which it is bound or subject; or (D) any judgment,decree, order or award of any court or any federal, state, or local judicial, legislative, or regulatory authority applicable to Mannatech or itsproperty or assets. Mannatech shall hold Supplier harmless of any responsibility for Mannatech’s violation of this paragraph.(v) There is no pending or, to Mannatech’s knowledge, threatened action, claim, suit, litigation, arbitration, investigation, notification,audit or other proceeding (“Proceedings”) against Mannatech, except for such Proceedings which would not individually or in theaggregate have a material adverse effect on Mannatech’s ability to perform its obligations hereunder.(vi) Mannatech possesses and maintains all required permits, authorizations and licenses issued by federal, state, and/or local authoritiesnecessary for the conduct of its business.(vii) Mannatech has the financial ability necessary to perform its obligations hereunder.9. Non-conforming Goods.(a) Acceptance by Mannatech of Manapol and/or Hi Fi delivered by Supplier is subject to inspection and applicable testing by Mannatech or a partydesignated by Mannatech to conduct such inspection or testing (“Testing Designee”). Such inspection and applicable testing shall be performed byMannatech or the Testing Designee no later than forty-five (45) business days from the date Manapol and/or Hi Fi is received by Mannatech. If onsuch inspection or testing Mannatech or its Testing Designee discovers that any Manapol and/or Hi Fi fails to conform with the Specifications inExhibit A or otherwise fails to conform to the warranties given by Supplier in Section 8(a) above, Mannatech or such Testing Designee may, no laterthan ten (10) business days from the date the results of the testing are prepared by or received by Mannatech, reject such Manapol and/or Hi Fi. Suchrejection will be accomplished by giving written notice to Supplier that specifies the manner in which Manapol and/or Hi Fi fails to meet theforegoing requirements. Except as in case of a Latent Defect, no more than fifty-five (55) business days shall pass from the date Manapol and/or Hi Fiis received by Mannatech, and the date a non-conforming goods notice is delivered to Supplier. Upon request from Supplier, Mannatech shall returnthe rejected Manapol and/or Hi Fi in accordance with Supplier's reasonable instructions at Supplier's expense, provided that such instructionscomply with all applicable laws, regulations and regulatory requirements. In the event of a dispute between the parties over the validity of arejection, Mannatech and Supplier agree to submit a sample of the rejected Manapol and/or Hi Fi to an independent test facility to be agreed by bothparties, and to accept the results of the testing performed by that facility as binding with regard to that lot of Manapol and/or Hi Fi. The expense ofsuch testing shall be borne by the losing party. Supplier shall use reasonable commercial efforts to replace the rejected Manapol and/or Hi Fi withinthirty (30) days after Supplier's receipt of notice.(b) Upon receipt of notice from Mannatech of non-conforming goods, Supplier shall, within five (5) business days, provide Mannatech with adelivery schedule representing supplier’s best estimate of the dates by which it can provide conforming goods. Mannatech shall have ten (10)business days following receipt of such delivery schedule to notify supplier of its election to either accept the delivery schedule or elect to receive arefund or credit of the price for the non-conforming goods as outlined below. If Mannatech elects to receive replacement Manapol and/or Hi Fi, thereplacement of rejected Manapol and/or Hi Fi will have priority over the supply of Manapol and/or Hi Fi ordered for shipment not more than ninety(90) days before, or any time after, the rejection of such nonconforming Manapol and/or Hi Fi. With respect to Mannatech electing to receive a creditor refund for the non-conforming goods, if a Manapol and/or Hi Fi shipment or part thereof is rejected before the date on which payment is due,Mannatech may withhold payment for such shipment or the rejected portion thereof. If a Manapol and/or Hi Fi shipment or portion thereof isrejected after payment, Mannatech, at its option may either (i) credit the amount paid against other amounts due to Supplier hereunder; or (ii)request a refund of the actual amount paid for the non-conforming shipment. If a refund is elected by Mannatech, payment in full shall be made bySupplier to Mannatech within ten (10) days of supplier’s receipt of Mannatech’s notice of election of refund. Failure by Mannatech to timelyrespond to its option to elect a refund will be deemed acceptance of the delivery schedule.(c) If, subsequent to investigation, a Manapol and/or Hi Fi shipment deemed by Mannatech to be rejected is found to meet Specifications, thenMannatech will not only pay for the originally shipped Manapol and/or Hi Fi but also any replacement Manapol and/or Hi Fi made, or in process,while the investigation was being conducted, and any costs related to the shipment and/or destruction of such originally shipped Manapol and/or HiFi. The warranties given by Supplier in Section 8(a) above will survive any failure to reject by Mannatech under this Section 9. Except for a LatentDefect as set forth in Section 9(d) below, Manapol and/or Hi Fi shipments will be deemed accepted if no notice to the contrary is received bySupplier within thirty (30) days of Mannatech’s receipt of such Manapol and/or Hi Fi.(d) As soon as either Party becomes aware of any defect in any Manapol and/or Hi Fi that is hidden or is not otherwise discoverable upon areasonable, general inspection or quality control testing ("Latent Defect”) as set forth in Exhibit A, but in no case later than sixty (60) days afterreaching such awareness, it shall immediately notify the other Party and, at Mannatech's election, shall be deemed rejected as of the date of suchnotice. In the event of such rejection by Mannatech, the applicable provisions of Section 9(a) will apply. Notwithstanding anything herein to thecontrary, Supplier will only be responsible for Latent Defects resulting from an act or omission of Supplier, reasonably demonstrated, relative to itsmanufacturing, packaging, and testing services responsibilities according to this Agreement. Mannatech and/or its Designee are responsible forensuring that the Manapol and Hi Fi are stored under proper conditions and stored in Supplier’s original packaging, and any defect or modificationresulting from failure to store Manapol and/or Hi Fi in proper conditions, will release Supplier from all liability under this Section 9.(e) IF SUPPLIER FAILS TO TIMELY SUPPLY THE CONFORMING GOODS IN ACCORDANCE WITH THE SCHEDULE PROVIDED TO ANDACCEPTED BY MANNATECH OR IF SUPPLIER FAILS TO TIMELY REMIT ANY REFUND DUE HEREUNDER, THEN SUCH FAILURE SHALLBE DEEMED A MATERIAL BREACH OF THIS AGREEMENT AND SHALL BE SUBJECT TO TERMINATION IN ACCORDANCE WITHSECTION 18(b)(ii).(f) Shipments of Manapol and/or Hi Fi not meeting the applicable Specifications may, at Supplier’s option and expense, be returned to Supplier ordestroyed by Mannatech. If Supplier is unable to produce conforming Manapol and/or Hi Fi, any sums actually paid therefore will be promptlyrefunded within ten (10) days after Mannatech’s receipt of such notice.(g) Except as provided in Section 8, there are no warranties or representations of any kind, express or implied, including but not limited to warrantiesof merchantability, fitness, and fitness for a particular purpose, or non-infringement made with respect to Manapol and/or Hi Fi to be sold hereunder,and none shall be implied by law.10. Quality Assurance.(a) The Parties agree that retained samples of Manapol and/or Hi Fi delivered pursuant to each Purchase Order will be provided to Mannatech fortesting on a mutually agreeable basis in accordance with the terms of Exhibit A.(b) Upon providing reasonable advance notice, which in no event shall be less than ten (10) business days, Mannatech shall have the right toperform quality inspections, of (i) the premises at which Manapol, Hi Fi, or other aloe-based products are produced; (ii) all of Supplier’s facilities andequipment relating to manufacture, storage and delivery of Manapol, Hi Fi, and all components thereof, including appropriate books and records ofSupplier including records relating to organization, manufacturing process and procedures, quality procedures, systems and controls; and (iii)Manapol and/or Hi Fi, prior to its shipment to Mannatech or Mannatech’s Designee. Mannatech may engage the services of an independentinspection firm, selected in its sole discretion, to perform such inspections. At all times, Mannatech’s personnel or consultants will be accompaniedby Supplier representatives and access will be limited to areas and documentation applicable to Mannatech and/or Manapol and/or Hi Fi. Anyinformation obtained or observed by Mannatech or its consultants will be deemed “Confidential Information” and subject to Section 13 below.11. Insurance. During the Term (including any extension) of this Agreement, Supplier shall have obtained (prior to commencement) and shall continuouslymaintain the insurance coverage described in this Section. Mannatech acknowledges that Supplier’s insurance related expenses will be included in the pricestructure for Manapol as set forth in Exhibit B. Supplier shall provide to Mannatech certificates of insurance evidencing such coverage. Each of the policiesmust, by endorsement, include Mannatech as an additional insured. Supplier will provide Mannatech with at least thirty (30) days’ prior written notice ofrenewal, cancellation or any material change in coverage. Supplier shall notify Mannatech of all legal actions or proceedings instituted by or againstSupplier reasonably likely to adversely affect Supplier’s performance of its obligations under this Agreement. Failure by Supplier to maintain insurancecoverage according to this Section 11 shall constitute a material breach of this Agreement. It is understood and agreed that the furnishing of such insurancecertificate will not relieve Supplier of its other respective obligations under this Agreement. Supplier shall obtain and maintain product liability coverage inan amount of not less than Ten Million United States Dollars (USD$10,000,000.00) written on a claims made basis.12. [Paragraph Intentionally Left Blank]13. Confidential Information.(a) Each Party may find it beneficial to disclose to the other Party certain information which may include, but is not limited to, (a) patents and patentapplications; (b) trade secrets; (c) copyrighted information; and/or (d) proprietary information, which may include but is not limited to discoveries,ideas, techniques, concepts, know-how, designs, specifications, drawings, maps, blueprints, diagrams, flow charts, information concerning researchand development, and/or other technical, financial or business information. Such information, which may be provided in written, encoded, graphic,or other tangible form will be deemed to be confidential and proprietary of the disclosing Party (regardless of whether it is marked “confidential”).The information disclosed as set forth above is hereinafter referred to as “Confidential Information.”(b) Supplier recognizes and acknowledges that Mannatech’s trade name(s), trademarks, copyrights, patents, marketing plans, identity of and relatedinformation regarding its Associates, product formulations and other proprietary product information and any information relating to themanagement and/or operations of Mannatech are valuable, proprietary assets belonging to Mannatech and as such are the sole property and mayconstitute trade secrets of Mannatech. Supplier specifically agrees that it will not at any time, during the Term and a renewal term, if any, or after thetermination of this Agreement, in any manner, either directly or indirectly, use, divulge, disclose, or communicate to any person, firm or corporation,any Confidential Information of any kind, nature, or description concerning any matters affecting or relating to the business of Mannatech. For theavoidance of doubt, Mannatech’s Confidential Information includes but is not limited to: Mannatech genealogies (being the information held byMannatech or by any current or former Associate of Mannatech related to its Associates including without limitation its relationship with each of itsAssociates, the Associate’s name, upline and downline, charts, data reports, proprietary product information which may from time-to-time be madeknown to Supplier, the names or practices of any of Mannatech’s customers or Associates); Mannatech’s marketing methods and related data; thenames of Mannatech’s vendors or suppliers; costs of materials; costs of its products generally, the prices Mannatech obtains or has obtained or atwhich it sells or has sold its products or services; manufacturing and sales costs; lists or other written records used in Mannatech’s business;compensation paid to its Associates, details of training methods, new products or new uses for old products or ingredients, product formulations,product or ingredient specifications, merchandising or sales techniques, contracts and licenses, business systems, computer programs, or any otherconfidential information of, about, or concerning the business of Mannatech; its manner of operation or other confidential data of any kind, natureor description.(c) Mannatech recognizes, acknowledges, and agrees that Supplier’s trade name(s), trademarks, copyrights, patents, marketing plans, productformulations, know-how, compounds, products, processes, designs, production methods andtechniques and other proprietary product information and any information relating to the management and/or operations of Supplier are valuable,proprietary assets and Confidential Information belonging to Supplier and as such are the sole property of Supplier and may constitute trade secretsof Supplier. Mannatech specifically agrees it will not at any time, during or after the performance of this Agreement, in any manner, either directly orindirectly, use, divulge, disclose, or communicate to any person, firm or corporation, any Confidential Information of any kind, nature, ordescription concerning any matters affecting or relating to the business of Supplier. For the avoidance of doubt, Supplier’s Confidential Informationincludes but is not limited to: the names or practices of any of Supplier’s customers; Supplier’s marketing methods and related data; the names ofSupplier’s vendors or suppliers; costs of materials; costs of its products generally, the prices Supplier obtains or has obtained or at which it sells orhas sold its products or services; manufacturing and sales costs; lists or other written records used in Supplier’s business, details of training methods,new products or new uses for old products, merchandising or sales techniques, contracts and licenses, business systems, computer programs, or anyother confidential information of, about, or concerning the business of Supplier; its manner of operation or other confidential data of any kind,nature or description.(d) Prior to the execution of this Agreement, the Parties may have provided each other with information considered “Confidential Information.” Suchinformation supplied prior to the execution of this Agreement will be considered in the same manner and be subject to the same treatment as theConfidential Information made available after the execution of this Agreement.(e) Information will not be considered “Confidential Information” to the extent, but only to the extent, that the receiving Party can validly establishthat such information: (i) is or becomes generally known or available to the public through no fault of the receiving Party or any third party; (ii) waslawfully in the receiving Party’s possession before receipt from the disclosing Party; (ii) is lawfully obtained from a third party who has the right tomake such disclosure; (iv) has been independently developed by the receiving Party without use of or reference to any Confidential Information ofthe disclosing Party; or (v) is required to be disclosed in order to comply with applicable law or regulation or with any requirement imposed byjudicial or administrative process or any governmental or court order but only to the extent required and, provided that, the recipient in eachinstance before making such disclosure first: (A) immediately upon receipt of such order notifies the other Party of such order and (B) cooperateswith the other Party in making, if available under applicable law, a good faith effort to obtain a protective order or other appropriate determinationagainst or limiting disclosure or use of the Confidential Information, at no cost to the recipient Party.(f) All Confidential Information shall remain the exclusive property of the disclosing Party. The disclosure of Confidential Information by thedisclosing Party shall not constitute an express or implied grant to the recipient Party, of any rights to or under the disclosing Party’s patents,copyrights, trade secrets, trademarks or any other intellectual property rights. Each Party shall protect the other’s Confidential Information fromunauthorized dissemination and use with the same degree of care that each such Party uses to protect its own non-public and ConfidentialInformation, but in no event less than a commercially reasonable degree of care.(g) Neither Party will use the other’s Confidential Information for purposes other than those necessary to directly further the purposes of thisAgreement. Neither Party will disclose to third parties the other’s Confidential Information without prior written consent of such other Party. Upontermination of this Agreement or upon written demand of the disclosing Party, the recipient Party shall immediately return (or destroy upon thedirection of the disclosing Party) any and all copies of the Confidential Information in its possession.14. Trademarks.(a) Supplier will not acquire any right under the Agreement to use, and must not use, the name “Mannatech®,” “Manapol®,” or “Mannatech,Incorporated” (either alone or in conjunction with or as a part of any other word or name) or any other trademarks, trade names, service marks,fanciful characters or designs of Mannatech or any of its affiliates in any advertising, publicity or promotion or other materials or uses, or to expressor imply any endorsement of Supplier's products or services, or in any manner or for any purpose whatsoever, without the prior written consent ofMannatech expressly authorizing such use.(b) Mannatech will not acquire any right under the Agreement to use, and must not use, the name “Natural Aloe de Costa Rica, SociedadAnónima,” or “Verapol®,” Naturmanan™ (either alone or in conjunction with or as a part of any other word or name) or any other trademarks, tradenames, service marks, fanciful characters or designs of Supplier or any of its affiliates in any advertising, publicity or promotion or other materials oruses, or to express or imply any endorsement of Mannatech’s products or services, or in any manner or for any purpose whatsoever, without the priorwritten consent of Supplier expressly authorizing such use.(c) The provisions of this Section 14 shall survive termination or expiration of this Agreement or any determination that this Agreement or anyportion is void or voidable.15. Remedies.(a) Supplier acknowledges that Mannatech has devoted considerable time and resources in connection with the development of its sales force andproducts and establishment of goodwill associated with the same. Supplier acknowledges that a breach by Supplier of Sections 6(a), 7(a), 7(b), 8(a)13, or 14 would cause Mannatech to suffer irreparable harm, for which damages would be difficult to assess and further agrees that Mannatech shallbe entitled to injunctive relief in addition to any other right or remedy Mannatech may have, including without limitation, any remedies set forth inthis Agreement herein and/or the recovery of damages for the breach of this or any other surviving provision(s) in this Agreement.(b) Mannatech acknowledges that:(i) Supplier has devoted considerable time and resources in connection with the development of its products, production procedures andmethods, trade secrets and intellectual property;(ii) A breach by it of Sections 6(b), 8(b) 13, or 14 would cause Supplier to suffer irreparable harm, for which damages would be difficult toassess and further agree that Supplier shall be entitled to injunctive relief in addition to any other right or remedy Supplier may have,including without limitation, the recovery of damages for the breach of this or any other surviving provision(s) in this Agreement; and(iii) A breach to the quarterly minimum purchase obligations assumed by Mannatech under Section 7 and Exhibit B of this Agreement, inaddition to any other remedies available to Supplier under this Agreement, which include termination, will entitle Supplier to deliver andcollect from Mannatech the minimum quarterly quantities of Manapol or, when and if applicable, Hi Fi, and will oblige Mannatech to payfor such minimum quarterly quantities as indicated in Exhibit B, even if such quantities have not been ordered by Mannatech during therelevant quarterly period. If Supplier elects to deliver the quarterly quantities and Mannatech makes the payment for those quantities, thebreach will be deemed cured and Supplier shall not have the right to terminate the Agreement.16. Disclaimer and Indemnity.(a) Subject to Supplier’s representations and warranties as set forth in Section 8 herein, Mannatech shall assume all financial and other obligationsfor use, sale and distribution of Mannatech’s products containing Manapol or Hi Fi, and Supplier shall not incur any liability or responsibility toMannatech or to third parties arising out of or connected in any manner with the use, sale and distribution of Mannatech’s products containingManapol or Hi Fi. WITHOUT LIMITING IN ANY MANNER THE PROVISION OF SECTION 15(b), IN NO EVENT SHALL MANNATECH BELIABLE TO SUPPLIER FOR LOST PROFITS, SPECIAL DAMAGES, CONSEQUENTIAL DAMAGES OR CONTINGENT LIABILITIES ARISINGOUT OF OR CONNECTED IN ANY MANNER WITH THIS AGREEMENT. Mannatech shall defend, indemnify and hold harmless Supplier and itsaffiliates, and their respective officers, directors, employees and agents, from and against all claims, suits, losses, causes of action, damages,liabilities, and expenses (including arbitration or court costs and attorney’s fees), arising out of or connected with (i) the use, sale or otherdisposition of the Mannatech products that contain Manapol or Hi Fi as an ingredient; or (ii) any breach by Mannatech of any of its respectiveobligations under this Agreement.(b) Notwithstanding anything contained herein to the contrary, Supplier shall assume all financial and other obligations related to its manufactureand production of Manapol, Hi Fi, and/or other products supplied by Supplier to Mannatech and Mannatech shall not incur any liability orresponsibility to Supplier or to third parties arising out of or connected in any manner with the production of Manapol and/or other productssupplied to Mannatech by Supplier. WITHOUT LIMITING IN ANY MANNER THE PROVISION OF SECTION 15(a), IN NO EVENT SHALLSUPPLIER BE LIABLETO MANNATECH FOR LOST PROFITS, SPECIAL DAMAGES, CONSEQUENTIAL DAMAGES OR CONTINGENT LIABILITIES ARISING OUTOF OR CONNECTED IN ANY MANNER WITH THIS AGREEMENT. Supplier expressly agrees to indemnify and hold harmless Mannatech and itsaffiliates, and their respective officers, directors, employees and agents, from and against all claims, suits, losses, causes of action, damages,liabilities, and expenses (including arbitration or court costs and attorney’s fees), arising on account of (i) the production of the products supplied toMannatech or its Designee by Supplier, but only to the extent caused in whole or in part by the negligent acts or omissions of Supplier or any of itsemployees, agents, representatives, subcontractors, or suppliers or anyone for whose acts they may be liable, or (ii) any breach by Supplier of any ofits respective obligations under this Agreement.17. Force Majeure.(a) As used in this Agreement, a “Force Majeure Event” means any act or event, whether foreseen or unforeseen, that (i) prevents a party (the“Nonperforming Party”), in whole or in part from performing its obligations under this Agreement or satisfying any conditions to the other Party’s(the “Performing Party’s”) obligations under this Agreement; (ii) is beyond the reasonable control of and the fault of the Nonperforming Party; and(iii) cannot be overcome or avoided by the exercise of due diligence. In furtherance of the definition of Force Majeure Event and not in limitation ofthat definition, each of the following acts and events is deemed to meet the requirements of this Section 17 and to be a Force Majeure Event: war,flood, lightning, drought, earthquake, fire, volcanic eruption, landslide, hurricane, cyclone, typhoon, tornado, explosion, civil disturbance, act ofGod or the public enemy, terrorist act, military action, epidemic, famine or plague, shipwreck, action of a court or public authority, or strike, work-to-rule action, go-slow or similar labor difficulty, each on an industry-wide, region-wide or nationwide basis. A Force Majeure Event does not includeeconomic hardship, changes in market conditions, insufficiency of funds, unavailability of equipment or supplies, or strikes, work-to-rule actions,go-slows or similar labor difficulties that are not on an industry-wide, region-wide, or nationwide basis.(b) If a Force Majeure Event occurs, the Nonperforming Party is excused from (i) whatever performance is prevented by the Force Majeure Event tothe extent so prevented; and (ii) satisfying whatever conditions precedent to the Performing Party’s obligations that cannot be satisfied, to the extentthey cannot be satisfied. Despite the preceding sentence, no obligation by either the Performing Party or the Nonperforming Party to make anypayment required under this Agreement is excused as a result of a Force Majeure Event.(c) The Nonperforming Party shall furnish the Performing Party with a written report describing the particulars of the occurrence, including anestimate of its expected duration and probable impact on the performance of the Nonperforming Party’s obligations under this Agreement no laterthan three (3) calendar days after becoming aware of the Force Majeure Event. During the continuation of the Force Majeure Event, theNonperforming Party shall furnish timely, regular written reports, updating the information regarding the Force Majeure Event and providing anyadditional information that the Performing Party reasonably requests.(d) During the continuation of the Force Majeure Event, the Nonperforming Party shall continue to (i) exercise commercially reasonable efforts tomitigate or limit damages to the Performing Party; (ii) exercise commercially reasonable due diligence to overcome the Force Majeure Event; (iii)perform its obligations under the Agreement (to the extent it is able); and (iv) cause the suspension of performance to be of no greater scope and nolonger duration than the Force Majeure Event requires.(e) When the Nonperforming Party is able to (i) resume performance of its obligations under this Agreement, or (ii) satisfy the conditions precedentto the Performing Party’s obligations, it shall immediately give the Performing Party written notice to that effect and shall resume performance underthis Agreement no later than three (3) calendar days after the notice is delivered. If the suspension of performance continues for a period of more thantwelve (12) consecutive months as a result of a Force Majeure Event, either Party is entitled to terminate this Agreement by giving notice to theother Party pursuant to the notice provision of this Agreement. The relief offered under this force majeure provision is the exclusive remedyavailable to the Nonperforming Party with respect to a Force Majeure Event.18. Rights Upon Default; Termination.(a) Supplier’s Rights Upon Default.(i)Termination With Cure Period. Upon the occurrence of any of the events specified below, Mannatech shall be in default of thisAgreement and Supplier shall have the right to terminate this Agreement upon thirty (30) days prior written notice (each such period, a“Mannatech Cure Period”) to Mannatech, specifying the default below and providing Mannatech with the applicable Mannatech CurePeriod to cure such default, except for Section 18. a (A) which cannot reasonably be cured upon default unless accepted in writing bySupplier. The termination shall be effective upon the expiration of the applicable Mannatech Cure Period if Mannatech fails to cure suchdefault. It shall be a breach of this Agreement and constitute good cause for termination of this Agreement if Mannatech:(A) Without the prior written consent of Supplier, fails to purchase the minimum quantities of Manapol for a quarter as specified inExhibit B, notwithstanding Suppliers right to collect all payments from Mannatech, pursuant to Section 15 (b) (iii). For claritypurposes and to avoid confusion, it is understood that, that subject to Paragraph 3 in Exhibit B and upon failure by Mannatech topurchase the minimum quantities of Manapol for any quarter, Supplier will be entitled, at its sole discretion, to decide whether toterminate this Agreement pursuant to this Section 18, or to collect all payments from Mannatech pursuant to Section 15 (b) (iii),and to change from one remedy to the other at any time, that is, to terminate instead of collecting payments, or to collect instead ofterminating this Agreement;(B) refuses or otherwise fails to pay when due any monetary obligation to Supplier under this Agreement;(C) violates any law, ordinance, rule or regulation of a governmental agency in connection with its use of Manapol and/or Hi Fi,and permits the same to go uncorrected after learning thereof; or(D) fails to comply with any other provision of this Agreement.Notwithstanding anything contained herein to the contrary, Supplier shall not have the right to terminate this Agreement if the correctiveaction necessary to cure such breach cannot be completed within the Mannatech Cure Period provided that Mannatech (i) has, within theapplicable Mannatech Cure Period, initiated the necessary and commercially reasonable action required to cure such breach and (ii) hasthereafter continued to take commercially reasonably efforts to complete the corrective action necessary to cure such breach within a timeperiod mutually agreed upon by the Parties. Further, as noted in Section 15 (b) (iii) above, if Supplier elects to collect payment as describedin Section 18 (a) (i) (A) above, the breach for failure to purchase the quarterly minimum will be deemed cured upon Mannatech’s paymentfor the quarterly deficiency and Supplier shall not have the right to terminate the Agreement.(ii) Immediate Termination. Mannatech may immediately terminate this Agreement effective upon receipt of written notice to Supplierupon the occurrence of any one or more of the following events:(A) Mannatech voluntarily seeks protection under any federal or state bankruptcy or insolvency laws;(B) a petition for bankruptcy or the appointment of a receiver is filed against Mannatech and is not dismissed within thirty (30)days thereafter;(C) Mannatech makes any assignment for the benefit of its creditors;(D) Mannatech ceases doing business.(b) Mannatech’s Rights Upon Default(i) Termination With Cure Period. Upon the occurrence of any of the events specified below, Supplier shall be in default of this Agreementand Mannatech shall have the right to terminate this Agreement upon thirty (30) days prior written notice for in the case of a monetarydefault (each a “Supplier Cure Period”) to Supplier, specifying the default below and providing Supplier with the applicable Supplier CurePeriod. The termination shall be effective upon the expiration of the applicable Supplier Cure Period if Supplier fails to cure the default. Itshall be a breach of this Agreement and constitute good cause for termination of this Agreement if Supplier:(A) fails to meet and adhere to Manapol and/or Hi Fi Specifications set forth in Exhibit A; provided, however, that Supplier maycure such breach by supplying replacement Manapol and/or Hi Fi or refunding the applicable payment of non-conforming productas set forth in Section 9(a);(B) violates any law, ordinance, rule or regulation of a governmental agency in the connection with the supply of Manapol and/orHi Fi to Mannatech, and permits the same to go uncorrected after learning thereof;(C) fails to maintain or suffers cancellation of any insurance policy required under this Agreement; or(D) fails to comply with any other provision of this Agreement.Notwithstanding anything contained herein to the contrary, Mannatech shall not have the right to terminate this Agreement if thecorrective action necessary to cure such breach cannot be completed within the Supplier Cure Period provided that Supplier (i) has, withinthe Supplier Cure Period, initiated the necessary and commercially reasonable action required to cure such breach and (ii) has thereaftercontinued to take commercially reasonableefforts to complete the corrective action necessary to cure such breach within a time period mutually agreed upon by the Parties.(ii) Immediate Termination. Mannatech may immediately terminate this Agreement effective upon receipt of written notice to Supplierupon the occurrence of any one or more of the following events:(A) Supplier violates Section 8(a);(B) Supplier fails to remedy non-conforming goods as described in Section 9(b)(C) there is an immediate threat or danger to public health or safety resulting from Supplier’s production and/or supply ofManapol, Hi Fi, and/or any other product manufactured by Supplier containing Manapol® powder and/or Hi Fi, as determined bya government agency or other competent authority;(D) Supplier voluntarily seeks protection under any federal or state bankruptcy or insolvency laws;(E) a petition for bankruptcy or the appointment of a receiver is filed against Supplier and is not dismissed within thirty (30) daysthereafter;(F) Supplier makes any assignment for the benefit of its creditors; or(G) Supplier ceases doing business19. Rights and Obligations Upon Expiration or Termination. Upon expiration or termination of this Agreement, the rights and obligations of the partiespursuant to this Agreement shall cease, except as follows: (i) obligations of confidentiality and use of information under Section 13 of this Agreement shallsurvive such expiration or termination; and (ii) the indemnity obligations under Section 16 shall survive such expiration or termination. The expiration ortermination of this Agreement for any reason by a Party shall not relieve the Parties of any obligation accruing prior to such expiration or termination.20. Further Assurances. The Parties shall execute and deliver such additional documents and take such additional actions as either Party may deemnecessary or appropriate to carry out more effectively the intent and purpose of this Agreement. All such additional documents and actions shall be deemedto have been executed, delivered, or taken on the Effective Date of this Agreement, except as may otherwise be appropriate.21. Authority. The Parties represent that they have full capacity and authority to execute, deliver and perform this Agreement and to grant all rights andassume all obligations they have granted and assumed under this Agreement.22. Assignment; Binding Effect. The Parties may not assign (by operating of law, merger or otherwise) this Agreement or any of its rights, interests orobligations hereunder without the prior written consent of the other Party; provided, however, Mannatech may assign any of its rights, interests or obligationshereunder to a parent, subsidiary or other affiliate without the prior written consent of Supplier. Any other purported assignment by a Party without the otherParty’s consent shall be null and void. Subject to this Section 22, this Agreement shall be binding upon and inure to the benefit of the Parties and theirrespective successors and permitted assigns.23. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which together shallconstitute one and the same instrument.24. Notices. All notices and other communications with respect to this Agreement must be in writing and either (a) hand-delivered by the Party giving noticeor by a recognized overnight delivery service which requires a written receipt of delivery; (b) faxed (as limited below); or (c) sent by certified or registeredmail, return receipt requested, addressed as follows or to such other address and attention as either of the parties shall notify the other in writing. A fax is validnotice only if a printed receipt of transmission receipt is generated at the time the fax is sent and the recipient acknowledges receipt. A fax will be deemedreceived on the transmission date if sent and received prior to 2:00 p.m. local time of the recipient. Faxes received after 2 p.m. local time will be deemedreceived on the following business day. If mailed, a notice will be deemed effective upon the earlier of its actual receipt or the third business day after it ispostmarked.If to Mannatech:Mannatech, Incorporated600 S. Royal Lane, Suite 200Coppell, Texas 75019USAAttn: Senior Vice President Global OperationsFax 00 +1 (972) 471-7261With a copy to General Counsel at same address andfax to 00 +1 (972) 471-7387legalservices@mannatech.comIf to Supplier:Natural Aloe de Costa Rica, S.A.4 Kilometers South of Main Entrance to City of LiberiaLiberia, Guanacaste 50101Costa RicaAttn: Yaacov Berman - PresidentFax: 011 + 506-2666-038425. Dispute Resolution(a) Governing Law. The Parties agree that this Agreement will be enforced and is governed by the laws of the State of Texas without regard to theconflicts of law principals. Each party consents to personal jurisdiction in Orange County, Florida, for any action to enforce arbitration includingany further rules provided for emergency or extraordinary relief, as to this Agreement.(b) Arbitration. Any controversy or claim arising out of or relating to this Agreement or the existence, validity, breach or termination thereof,whether during or after its term, will be finally settled by compulsory arbitration in accordance with the Commercial Arbitration Rules andSupplementary Procedures for Commercial Arbitration of the American Arbitration Association (“AAA”); provided, however, that in the event of anysuch controversy or claim: (i) neither Party will initiate arbitration within the first thirty (30) days after the aggrieved Party first notifies the otherParty of the controversy or claim; and (ii) during such thirty (30) day period, the chief executive officers of both Parties convene at least once inDallas, Texas, to endeavor in good faith to amicably resolve the controversy or claim.To initiate arbitration, either Party will file the appropriate notice at the appropriate Regional Office of the AAA for Orange County, Florida. Thearbitration proceeding will take place during a period not exceeding three (3) days. The arbitration panel will consist of three (3) arbitrators, onearbitrator appointed by each Party and a third neutral arbitrator appointed by the AAA. Any communication between a Party and any arbitrator willbe directed to the AAA for transmittal to the arbitrator.The arbitral award will be the exclusive remedy of the Parties for all claims, counterclaims, issues or accountings presented or plead to the arbitrators.The award will (i) be granted and paid in U.S. Dollars exclusive of any tax, deduction or offset; and (ii) include interest from the date of breach orother violation of the Agreement until the award is fully paid, computed at the then-prevailing London InterBank Offered Rate (LIBOR rate).Judgment upon the arbitral award may be entered in any court that has jurisdiction thereof. Any additional costs, fees or expenses incurred inenforcing the arbitral award will be charged against the party that resists its enforcement.26. Interpretation. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present orfuture laws, such provision shall be fully severable and the remaining provisions hereof shallremain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement. Upon suchdetermination that any provision is invalid, illegal or unenforceable, the Parties shall negotiate in good faith to modify this Agreement to effect the originalintent of the Parties as closely as possible to the fullest extent permitted by applicable law to the end that the transactions contemplated hereby are fulfilledto the greatest extent possible.27. No Waiver. The failure of either Party to insist upon strict performance of any obligation hereunder by the other Party, irrespective of the length of timefor which such failure continues, shall not be a waiver of its right to demand strict compliance in the future. No consent or waiver, express or implied, byeither Party to or of any breach or default in the performance of any obligation hereunder by the other Party shall constitute a consent or waiver to or of anyother breach or default in the performance of the same or any other obligation hereunder.28. No Inconsistent Actions. Each Party hereto agrees that it will not voluntarily undertake any action or course of action inconsistent with the provisions orintent of this Agreement and, subject to Section 13 hereof, will promptly do all acts and take all measures as may be appropriate to comply with the terms,conditions and provisions of this Agreement.29. Survival. The expiration or termination of this Agreement shall not impair the rights or obligations of the Parties which have accrued hereunder prior tosuch expiration or termination. The provisions of Sections 6(a), 8, 10, 13, 14, 15, 16, 18 and 19 hereof, and the rights and obligations of the Partiesthereunder, shall survive the expiration or termination of this Supply Agreement.30. Entire Agreement. Except as otherwise contemplated hereby, this Agreement (together with the Exhibits hereto and the certificates, documents,instruments and other writings that are delivered pursuant hereto) constitutes the entire agreement between the Parties with regard to the subject mattercontained herein, and supersedes all prior or contemporaneous oral or written agreements, conditions, representations, and/or understandings, between theParties.[Signature Page Follows]IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.MANNATECH, INCORPORATEDBy: ____________________________________________Name: ____________________________________________Title: ____________________________________________NATURAL ALOE de COSTA RICA, S.A.By: ____________________________________________Name: ____________________________________________Title: ____________________________________________EXHIBIT AQUALITY SPECIFICATIONS[***]11 Denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to a confidential treatmentrequest under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.EXHIBIT BPRICING SCHEDULE1. Manapol. The base price for Manapol is $[***]1 per kilogram EXW, Liberia, Costa Rica. NACR agrees to reduce the price per kilogram if certain volumecommitments are met pursuant to the table below.[***]1 Mannatech agrees to purchase a minimum of [***]1 of Manapol per month during the first full calendar month of this Agreement through [***]1. Thereafter,Mannatech agrees to purchase [***]1 per month beginning [***]1 through [***]1, for a total minimum of [***]1 during [***]1. Commencing [***]1,Mannatech agrees to purchase [***]1 per month, and a total minimum of [***]1. The parties agree that monthly minimums may vary as long as at the end ofeach calendar quarter, Mannatech has met its quarterly minimum purchase requirement. The parties further agree that any quarterly purchases in excess of thequarterly minimum for the respective years, may be carried over to the next quarter. However, purchases in excess of the quarterly minimum may not becarried back nor applied to previous months.Supplier agrees and acknowledges that Mannatech’s minimum purchase requirements may be made through a Designee such as one or more of its contractmanufacturers. These Designees will receive the same pricing as if Mannatech itself were making the purchase and all such purchases of Manapol will counttowards the purchase minimums.If at any time during this Agreement, Mannatech or any of its Designee(s) exceeds a volume of [***]1 per month for three consecutive months, then theParties agree to negotiate in good faith toward adding new volume/price discount levels. However, the new conditions shall be contingent upon theobligation by Mannatech to maintain this volume for a reasonable period of time.2. Hi Fi. The price for Hi Fi is $[***]1 per kilogram. Supplier and Mannatech have a shared interest and intention for transitioning Mannatech purchasevolume of the existing aloe vera gel extract, to the Supplier’s whole leaf aloe (Hi Fi), and will work together during the first year of this agreement to identifyproducts and countries where this ingredient transition may take place. The challenges for this transition include, but are not limited to, the current densityof the Hi Fi product, and regulatory limitations for using a whole leaf aloe in certain countries. For these reasons, no minimum purchase quantities can beestablished at this time. Mannatech also offers to explore new product development opportunities with the Supplier, for using the Hi Fi material as aningredient.After the expiration of the [***]1 year exclusivity period granted to Mannatech in this Agreement, Mannatech shall have the right to renew the exclusivityagreement for an additional [***]1 year period if, and only if, Mannatech agrees to purchase a minimum volume of [***]1 per month beginning [***]1 of therenewal period and through [***]1. If Mannatech is not able to reach to this minimum amount starting [***]1 of the renewal period, the exclusivity rightwould be immediately terminated.Supplier acknowledges and agrees that Mannatech’s Designee(s) such as one or more of its contract manufacturers will be entitled to the same pricing as ifMannatech were making the purchase.3. Monthly Report and Quarterly Reconciliation. Supplier shall provide Mannatech with a monthly report detailing all purchases made in the previousmonth by Mannatech and its Designees. Supplier shall furnish the report to Mannatech within [***]1 business days following the end of the month.Mannatech shall have [***]1 days following the last day of the quarter to reconcile the reported purchases with its Designees and correct any deficiencies inminimum purchase quantities for the quarter by purchasing the difference between the minimum purchase quantity and the actual reported purchases prior toSupplier exercising its rights under Sections 15(b)(iii) and 18(a)(i)(A).[***]1 Denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to a confidential treatmentrequest under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.Natural Aloe de Costa Rica S.A.Summary of Historical CostsOctober 2015 - October 2016[***]1 [***]1 Denotes confidential information that has been omitted from this exhibit and filed separately with the Securities and Exchange Commission pursuant to a confidential treatmentrequest under Rule 24b-2 of the Securities Exchange Act of 1934, as amended.Exhibit 21List of SubsidiariesThe Company has these wholly-owned subsidiaries located throughout the world, as follows:1.Mannatech Australia Pty Limited2.Mannatech Japan, G.K.3.Mannatech Korea, Ltd.4.Mannatech Limited (a New Zealand Company)5.Mannatech Limited (a UK Company)6.Mannatech Taiwan Corporation7.Mannatech Payment Services Incorporated8.Mannatech Products Company Inc.9.Internet Health Group, Inc.10.Mannatech (International) Limited11.Mannatech, Incorporated Malaysia Sdn. Bhd.12.Mannatech Singapore Pte. Ltd.13.Mannatech Canada Corporation14.Mannatech South Africa (Pty) Ltd15.Mannatech Bermuda Holdings Limited16.Mannatech Denmark ApS17.Mannatech (Gibraltar) Holdings Limited18.Mannatech Swiss Holdings GmbH19.Mannatech Swiss International GmbH20.Mannatech Malaysia Trading Co. Sdn. Bhd.21.Mannatech Norge A/S22.Mannatech Sverige AB23.MTEX Mexico SRL CV24.MTEX Mexico Services SRL CV25.Mannatech Cyprus Limited26.Mannatech Ukraine LLC27.MTEX Hong Kong Limited28.Mannatech Colombia SAS29.Mannatech RUS Ltd.30.Meitai Daily Necessity & Health Products Co., Ltd.31.Meitai Daily Necessity & Health Products Co., Ltd. Guangzhou BranchExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and ShareholdersMannatech, IncorporatedWe 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, 333-182676 and 333-197400) and Form S-3 (File No. 333-169774) of Mannatech, Incorporated and Subsidiaries of our reports dated March 14, 2017, relating to the consolidated financial statements and financialstatement schedule which appear in this Form 10-K./s/ BDO USA, LLPDallas, TexasMarch 14, 2017Exhibit 23.2REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULEBoard of Directors and ShareholdersMannatech, IncorporatedCoppell, TexasThe audit referred to in our report dated March 14, 2017 relating to the consolidated financial statements of Mannatech, Incorporated andSubsidiaries, which is contained in Item 15(a)(1) of this Form 10K also included the audit of the financial statement schedule listed in Item 15(a)(2) of thisForm 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on thefinancial 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, presentsfairly, in all material respects, the information set forth therein./s/ BDO USA, LLPDallas, TexasMarch 14, 2017Exhibit 31.1CERTIFICATIONPURSUANT TO 17 CFR 240.13a-14PROMULGATED UNDERSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Alfredo Bala, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 withinthose 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 arereasonably 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 internalcontrol over financial reporting.Date: March 14, 2017/s/ Alfredo BalaAlfredo BalaChief Executive Officer(principal executive officer)Exhibit 31.2CERTIFICATIONPURSUANT TO 17 CFR 240.13a-14PROMULGATED UNDERSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, David A. Johnson, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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 withinthose 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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 arereasonably 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 internalcontrol over financial reporting.Date: March 14, 2017/s/ David A. JohnsonDavid A. JohnsonChief Financial Officer(principal financial officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Mannatech, Incorporated (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Alfredo Bala, Chief Executive Officer of the Company, hereby certify, pursuantto 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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 14, 2017/s/ Alfredo BalaAlfredo BalaChief Executive Officer(principal executive officer)A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO MANNATECH, INCORPORATEDAND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Mannatech, Incorporated (the “Company”) on Form 10-K for the period ending December 31, 2016 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Johnson, 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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: March 14, 2017/s/ David A. JohnsonDavid A. JohnsonChief Financial Officer(principal financial officer)A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO MANNATECH, INCORPORATEDAND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.Exhibit 99.1MANNATECH, INCORPORATED AND SUBSIDIARIESSCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS(in thousands) Additions Balance atBeginning ofYear Charged toCosts andExpenses Charged tootherAccounts Deductions Balance atEnd of YearYear Ended December 31, 2015 Deducted from asset accounts: Allowance for doubtful accounts$213369—(321)$261Allowance for obsolete inventories$2,142480—(1,357)$1,265Valuation allowance for deferred tax assets$9,745180—(897)$9,028Included in accrued expenses: Reserve for sales returns$2071,446—(1,506)$147Year Ended December 31, 2016 Deducted from asset accounts: Allowance for doubtful accounts$261562—(360)$463Allowance for obsolete inventories$1,265343—(1,227)$381Valuation allowance for deferred tax assets$9,028463—(1,033)$8,458Included in accrued expenses: Reserve for sales returns$1471,334—(1,352)$129

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