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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 30, 2014

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________.

Commission File No. 000-24657

MANNATECH, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

 

Registrant’s Telephone Number, including Area Code:  (972) 471-7400

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No o

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

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MANNATECH, INCORPORATED

TABLE OF CONTENTS

 

Special Note Regarding Forward-Looking Statements		1
Part I – FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	2
	Consolidated Statements of Operations - Unaudited	3
	Consolidated Statements of Comprehensive Loss - Unaudited	3
	Consolidated Statement of Shareholders’ Equity - Unaudited	4
	Consolidated Statements of Cash Flows - Unaudited	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Company Overview	15
	Results of Operations	16
	Liquidity and Capital Resources	26
	Critical Accounting Policies and Estimates	28
	Recent Accounting Pronouncements	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
Part II – OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Signatures		36

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Certain disclosures and analyses in this Form 10-Q, including information incorporated by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 that are subject to various risks and uncertainties. Opinions, forecasts, projections, guidance, or other statements other than statements of historical fact are considered forward-looking statements and reflect only current views about future events and financial performance. Some of these forward-looking statements include statements regarding:

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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;

 

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the outcome of new or existing litigation matters;

 

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the outcome of new or existing regulatory inquiries or investigations; and

 

§

other assumptions described in this report underlying such forward-looking statements.

Although we believe that the expectations included in these forward-looking statements are reasonable, these forward-looking statements are subject to certain events, risks, assumptions, and uncertainties, including those discussed below, the “Risk Factors” section in Part I, Item 1A of our Form 10-K for the year ended December 31, 2013, and the “Risk Factors” section in Part II, Item 1A of this Form 10-Q, and elsewhere in this Form 10-Q and the documents incorporated by reference herein. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results and developments could materially differ from those expressed in or implied by such forward-looking statements. For example, any of the following factors could cause actual results to vary materially from our projections:

§

overall growth or lack of growth in the nutritional supplements industry;

 

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plans for expected future product development;

 

§

changes in manufacturing costs;

 

§

shifts in the mix of packs and products;

 

§

the future impact of any changes to global associate career and compensation plans or incentives;

 

§

the ability to attract and retain independent associates and members;

 

§

new regulatory changes that may affect operations or products;

 

§

the competitive nature of our business with respect to products and pricing;

 

§

publicity related to our products or network-marketing; and

 

§

the political, social, and economic climate.

Forward-looking statements generally can be identified by use of phrases or terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “projects,” “potential,” and “continues” or other similar words or the negative of such terms and other comparable terminology. Similarly, descriptions of Mannatech’s objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. Readers are cautioned when considering these forward-looking statements to keep in mind these risks, assumptions, and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speak only as of the date of this report.

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

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

See accompanying notes to unaudited consolidated financial statements.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED)

(in thousands, except per share information)

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) – (UNAUDITED)

(in thousands)

See accompanying notes to unaudited consolidated financial statements.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

– (UNAUDITED)

(in thousands)

See accompanying notes to unaudited consolidated financial statements.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

(in thousands)

 

See accompanying notes to unaudited consolidated financial statements.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Coppell, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “MTEX”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products. We currently sell our products into three regions: (i) North America (the United States, Canada and Mexico); (ii) Europe/Middle East/Africa, or “EMEA” (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan and Hong Kong). On March 21, 2014, the Company announced temporary suspension of operations in Ukraine due to political turmoil and ongoing instability in the country.

Independent associates (“associates”) purchase the Company’s products at published wholesale prices to either sell to retail customers or for personal use. Members purchase the Company’s products at a discount from published retail prices primarily for personal use.  The Company cannot distinguish products sold for personal use from other sales because it is not involved with the products after delivery, other than usual and customary product warranties and returns. Only associates are eligible to earn commissions and incentives.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the Company’s consolidated financial statements and footnotes contained herein do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) to be considered “complete financial statements”. However, in the opinion of the Company’s management, the accompanying unaudited consolidated financial statements and footnotes contain all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s consolidated financial information as of, and for, the periods presented. The Company cautions that its consolidated results of operations for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, 2013 consolidated balance sheet was included in the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2013 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 18, 2014 (the “2013 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2013 Annual Report.

Principles of Consolidation

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

Reclassifications

Certain reclassifications have been made to the financial statements for prior periods to conform to the current period presentation.

Use of Estimates

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

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

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includes in its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are received within 24 to 72 hours of submission to the credit card processor. As of each of June 30, 2014 and December 31, 2013, credit card receivables were $2.7 million and $0.6 million, respectively. As of each of June 30, 2014 and December 31, 2013, cash and cash equivalents held in bank accounts in foreign countries totaled $23.1 million and $14.7 million, respectively. The Company invests cash in liquid instruments, such as money market funds and interest bearing deposits.  The Company also holds cash in high quality financial institutions and does not believe it has an excessive exposure to credit concentration risk.

Restricted Cash

The Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) the Australia building lease collateral. As of June 30, 2014 and December 31, 2013, our total restricted cash was $5.9 million and $5.8 million, respectively.

Accounts Receivable

Accounts receivable are carried at their estimated collectible amounts. Receivables are created upon shipment of an order if the credit card payment is rejected or does not match the order total. As of June 30, 2014 and December 31, 2013, receivables consisted primarily of amounts due from members and associates. The Company periodically evaluates its receivables for collectability based on historical experience, recent account activities, and the length of time receivables are past due and writes-off receivables when they become uncollectible. As of each of June 30, 2014 and December 31, 2013, the Company held an allowance for doubtful accounts of $0.3 million and $0.1 million, respectively.

Inventories

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

Other Assets

As of June 30, 2014 and December 31, 2013, other assets were $3.9 million and $3.6 million, respectively, and primarily consisted of deposits for building leases in various locations of $1.7 million and $1.4 million, respectively.   Additionally, included in the June 30, 2014 and December 31, 2013 balances was $1.8 million, representing a deposit with Mutual Aid Cooperative and Consumer in the Republic of Korea, an organization established by the Republic of Korea’s Fair Trade Commission to protect consumers who participate in network marketing activities. Also included in the June 30, 2014 and December 31, 2013 balances was $0.2 million of indefinite lived intangible assets relating to the Manapol ® powder trademark.

Other Long-Term Liabilities

Other long-term liabilities were $2.2 million and $2.1 million as of June 30, 2014 and December 31, 2013, respectively. At June 30 and December 31, 2013, the Company recorded $0.7 million in other long-term liabilities related to uncertain income tax positions (see Note 8, Income Taxes of the Company’s 10-K, filed March 18, 2014). Certain operating leases for the Company’s regional office facilities contain a restoration clause that requires the Company to restore the premises to its original condition. Accrued restoration costs related to these leases amounted to $0.4 million and $0.2 million at June 30, 2014 and December 31, 2013, respectively. The Company also recorded a long-term liability for estimated defined benefit obligation related to a non-U.S. defined benefit plan for its Japan operations of $0.7 million and $0.6 million at June 30, 2014 and December 31, 2013, respectively (See Note 10, Employee Benefit Plans, of the Company’s 10-K, filed March 18, 2014).

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue Recognition and Deferred Commissions

The Company’s revenue is derived from sales of individual products, sales of its starter and renewal packs, and shipping fees. Substantially all of the Company’s product and pack sales are made to associates at published wholesale prices and to members at discounted published retail prices. The Company records revenue net of any sales taxes and records a reserve for expected sales returns based on its historical experience.

The Company recognizes revenue from shipped packs and products upon receipt by the customer. Corporate-sponsored event revenue is recognized when the event is held. The Company defers certain components of its revenue. Deferred revenue consisted primarily of: (i) sales of packs and products shipped but not received by the customers by the end of the respective period; (ii) revenue from the loyalty program; and (iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event. At June 30, 2014 and December 31, 2013, the Company’s deferred revenue was $11.3 million and $6.4 million, respectively. During the third quarter of 2013, the Company started a loyalty program through which customers earn loyalty points from qualified automatic orders, which can be applied to future purchases. The Company defers the dollar equivalent in revenue of these points until the points are applied or forfeited, which includes an estimate of the percentage of the unvested loyalty points that are expected to be forfeited. The deferred revenue associated with the loyalty program at June 30, 2014 and December 31, 2013, respectively was $9.1 million and $5.5 million. In total current assets, the Company defers commissions on (i) the sales of packs and products shipped but not received by the customers by the end of the respective period and (ii) the loyalty program. Deferred commissions were $4.8 million and $2.7 million at June 30, 2014 and December 31, 2013, respectively.

We estimate a sales return reserve for expected sales refunds based on our historical experience over a rolling six- month period. If actual results differ from our estimated sales return reserve due to various factors, the amount of revenue recorded each period could be materially affected. Historically, our sales returns have not materially changed through the years, as the majority of our customers who return their merchandise do so within the first 90 days after the original sale. Sales returns have averaged 1.5% or less of our gross sales. For the six months ended June 30, 2014 our sales return reserve consisted of the following (in thousands):

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Shipping and Handling Costs

The Company records freight and shipping fees collected from its customers as revenue. The Company records inbound freight as a component of inventory and cost of sales. Total revenue from freight and shipping fees were approximately $1.8 million and $1.9 million for the three months ended June 30, 2014 and 2013, respectively, and $3.7 million and $3.8 million for the six months ended June 30, 2014 and 2013, respectively. Total freight costs for shipping products to our customers included in cost of sales were approximately $1.7 million for the three months ended June 30, 2014 and 2013, respectively, and $3.3 million for the six months ended June 30, 2014 and 2013, respectively.

Commissions and Incentives

Associates earn commissions and incentives based on their direct and indirect commissionable net sales over 13 business periods each year. Each business period equals 28 days. The Company accrues commissions and incentives when earned by associates and pays commissions on product sales three weeks following the business period end and pays commissions on its pack sales five weeks following the business period end.

Total commissions and incentive expenses were approximately $19.8 million and $19.2 million for the three months ended June 30, 2014 and 2013, respectively, and $36.8 million and $36.7 million for the six months ended June 30, 2014 and 2013, respectively.

Comprehensive Income (loss) and Accumulated Other Comprehensive Income (loss)

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

NOTE 2: INVENTORIES

Inventories consist of raw materials and finished goods, which also includes promotional materials. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories at June 30, 2014 and December 31, 2013, consisted of the following (in thousands):

NOTE 3: INCOME TAXES

For the three and six months ended June 30, 2014, the Company’s effective tax rate was 183.7% and 124.8%, respectively. For the three and six months ended June 30, 2013, the Company’s effective income tax rate was (429.5)% and (18.4)%,  respectively.  For the three and six months ended June 30, 2014 and 2013, the Company’s effective tax rate was determined based on the estimated annual effective tax rate.

The effective tax rates for the three and six months ended June 30, 2014 were higher than what would have been expected if the federal statutory rate were applied to income before taxes. Items increasing the effective income tax rate included the change in the valuation allowances associated with certain deferred tax assets and the unfavorable rate differences from foreign jurisdictions. In addition, in the second quarter 2014, it was determined a deemed intercompany dividend had occurred in 2012 and 2013 related to an intercompany working capital loan that originated in 2012; the Company recorded the expense, which is not material to the financial statements for the year. We have not initiated any further intercompany transactions like the 2012 transaction, nor do we anticipate the need for further transactions of this type.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The examination of our 2005-2009 tax years by the IRS for U.S. federal tax purposes was settled during the second quarter of 2013. The settlement of the audit resulted in a $1.0 million tax benefit during the three months ended June 30, 2013. Excluding the release of uncertain income tax positions in connection with the settlement of the IRS audit, the effective tax rate for the three and six months ended June 30, 2013 would have been 263.2% and 66.7%. These rates are higher than what would have been expected if the federal statutory income tax rate were applied to income before taxes primarily from the unfavorable differences from foreign operations.

NOTE 4: EARNINGS (LOSS) PER SHARE

The Company calculates basic Earnings per Share (“EPS”) by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS also reflects the potential dilution that could occur if common stock were issued for awards outstanding under the 2008 Stock Incentive Plan. In determining the potential dilution effect of outstanding stock options during the three months ended June 30, 2014 and 2013, the Company used the quarter’s average common stock close price of $15.13 and $9.15 per share, respectively. In determining the potential dilution effect of outstanding stock options during the six months ended June 30, 2014 and 2013, the Company used the six month average common stock close price of $15.95 and $7.66 per share, respectively. The Company reported net loss for the three and six months ended June 30, 2014. For the three and six months ended June 30, 2013, approximately 0.1 million shares of the Company’s common stock subject to options were excluded from the diluted EPS calculation, as the effect would have been antidilutive.

NOTE 5: STOCK-BASED COMPENSATION

The Company currently has one active stock-based compensation plan, which was approved by shareholders. The Company grants stock options to employees, consultants, and board members at the fair market value of its common stock, on the date of grant, with a term no greater than ten years. The majority of stock options vest over two or three years. Shareholders who own 10% or more of the Company’s outstanding stock are granted incentive stock options at an exercise price that may not be less than 110% of the fair market value of the Company’s common stock on the date of grant and have a term no greater than five years.

In February 2008, the Company’s Board of Directors approved the Mannatech, Incorporated 2008 Stock Incentive Plan, as amended (the “2008 Plan”), which reserves up to 200,000 shares for issuance of stock options and restricted stock to our employees, board members, and consultants, plus any shares reserved under the Company’s then-existing, unexpired stock plans for which options had not yet been issued, and any shares underlying outstanding options under the then-existing stock option plans that terminate without having been exercised in full. The 2008 Plan was approved by the Company’s shareholders at the 2008 Annual Shareholders’ Meeting and was amended at the 2012 Annual Shareholders’ Meeting to increase the number of shares of common stock subject to the plan by 100,000. At the 2014 Annual Shareholders’ Meeting, the 2008 Plan was amended again to increase the number of shares of common stock subject to the plan by 130,000. As of June 30, 2014, the 2008 Plan had 136,695 stock options available for grant before the plan expires on February 20, 2018.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the three months ended June 30, 2014 and 2013, the Company granted 15,000 and 5,000 stock options, respectively. During the six months ended June 30, 2014 and 2013, the Company granted 81,000 and 80,000 stock options, respectively. The fair value of stock options granted during the three months ended June 30, 2014 ranged from $9.02 to $10.60 per share. The fair value of stock options granted during the six months ended June 30, 2014 ranged from $9.02 to $12.09 per share. The Company recognized compensation expense as follows for the three and six months ended June 30 (in thousands):

As of June 30, 2014, the Company expects to record compensation expense in the future as follows (in thousands):

NOTE 6: SHAREHOLDERS’ EQUITY

Accumulated other comprehensive loss, displayed in the Consolidated Statement of Shareholders’ Equity and Comprehensive Loss, represents net loss plus the results of certain shareholders’ equity changes not reflected in the Consolidated Statements of Operations, such as foreign currency translation and certain pension and post-retirement benefit obligations. The after-tax components of accumulated other comprehensive loss, are as follows (in thousands):

1

No amounts reclassified from accumulated other comprehensive loss

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

On May 10, 2013 the Company was served notice of a lawsuit filed by Ms. Natalie Clark, a former executive with the Company, in the 192nd Judicial District Court, Dallas County, Texas (the “Court”) alleging discrimination and harassment based on gender. Ms. Clark alleged that she was stripped of her duties and wrongfully discharged as part of an alleged “purge of females in key positions” within the Company. Ms. Clark sought damages in excess of $1,000,000. The Court issued a standard mediation order; mediation was conducted on May 14, 2014. The parties reached a settlement of the dispute at mediation, and on June 11, 2014 the Company executed a Settlement Agreement (the “Agreement”) with Ms. Clark, the terms of which are confidential. The Settlement Agreement is not an admission of wrongdoing by the Company, but is merely a good faith settlement of disputed and unresolved claims. The Company specifically denies and disclaims any liability to Ms. Clark and contends that her claims were without merit. On June 20, 2014 an Agreed Order of Dismissal with Prejudice was issued by the Court. The Company considers this matter closed.

 

Mannatech, Incorporated v. Wellness Quest, LLC and Harley Reginald McDaniel,  Case No. 3:14-cv-2497, U.S. District Court, for the Northern District of Texas, Dallas Division

On 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 Dietary Supplements,” (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.

This lawsuit continues the Company’s enforcement of its patent rights, and the Company intends to vigorously prosecute this matter.  Based on the 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, the Company believes there is a strong likelihood that it will obtain permanent injunctions against the manufacture and sale of any infringing products for the duration of the Company’s patents.

 

NOTE 8: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods to customers in an amount that reflects the consideration to which the entity expects in exchange for those goods. To achieve that core principle, an entity should apply the following steps:

-Step 1: Identify the contract(s) with a customer.

-Step 2: Identify the performance obligations in the contract.

-Step 3: Determine the transaction price.

-Step 4: Allocate the transaction price to the performance obligations in the contract.

-Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The standard is effective for the Company for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures.) Early application is not permitted.   Management is currently evaluating the impact of the Company’s pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which the Company will adopt the standard in 2017.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9: FAIR VALUE

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

Fair Value Measurements and Disclosure Topic 820 of the FASB Accounting Standards Codification (“ASC”) establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

·

Level 1 – Quoted unadjusted prices for identical instruments in active markets.

·

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets.

·

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.

The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. The investment instruments held by the Company are money market funds and interest bearing deposits for which quoted market prices are readily available. The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company does not have any material financial liabilities that were required to be measured at fair value on a recurring basis at June 30, 2014.

The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of June 30, 2014.

NOTE 10: SEGMENT INFORMATION

The Company conducts its business as a single operating segment, consolidating all of its business units into a single reportable entity, as a seller of proprietary nutritional supplements, topical and skin care products, and weight-management products through its network marketing distribution channels operating in twenty-three countries. Each of the Company’s business units sells similar packs and products and possesses similar economic characteristics, such as selling prices and gross margins. In each country, the Company markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financial information by country and focuses its internal reporting and analysis of revenues by packs and product sales. The Company sells its products through its associates and distributes its products through similar distribution channels in each country. No single associate has ever accounted for more than 10% of the Company’s consolidated net sales.

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MANNATECH, INCORPORATED AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company operates facilities in ten countries and sells product in twenty-three countries around the world. These facilities are located in the United States, Canada, Switzerland, Australia, the United Kingdom, Japan, the Republic of Korea (South Korea), Taiwan, South Africa and Mexico. Each facility services different geographic areas. We currently sell our products in three regions: (i) North America (the United States, Canada and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan and Hong Kong). On March 21, 2014, the Company announced temporary suspension of operations in Ukraine, due to political turmoil and ongoing instability in the country.

Consolidated net sales shipped to customers in these regions, along with pack and product information for the three and six months ended June 30, are as follows (in millions, except percentages):

Long-lived assets, which include property, equipment and construction in progress for the Company and its subsidiaries, reside in the following regions (in millions):

Inventory balances by region, which consist of raw materials, work in progress, finished goods, and promotional materials, as offset by obsolete inventories, were as follows (in millions):

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three and six months ended June 30, 2014 as compared to the same period in 2013, and should be read in conjunction with Item I “Financial Statements” in Part I of this quarterly report on Form 10-Q. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis.

COMPANY OVERVIEW

Since November 1993, we have continued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network marketing system. We operate in three regions: (i) North America (the United States, Canada and Mexico); (ii) EMEA (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Sweden, and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan and Hong Kong). Our Switzerland office manages certain day-to-day business needs of non-North American markets.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 239,000 active independent associates and members who have purchased our products and/or packs within the last 12 months, who we refer to as active independent associates and members. New recruits and pack sales are leading indicators for the long-term success of our business. New recruits include new independent associates and members purchasing our packs and products for the first time. We operate as a seller of nutritional supplements, topical and skin care products, and weight-management products through our network marketing distribution channels operating in twenty-three countries. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.

Because we sell our products through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of active independent associates and members; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure.

Current Economic Conditions and Recent Developments

Overall net sales increased $1.5 million, or 3.4% during the three months ended June 30, 2014, as compared to the same period in 2013 as revenue per active associate and member increased in North America and Asia/Pacific. Our operations outside of North America accounted for approximately 54.9% of our consolidated net sales. The number of active independent associates and members at June 30, 2014 decreased 0.4% as compared to the same period in 2013. The decrease in continuing associates and members was partially offset by the increase in new associates and members.

We are experiencing strong demand for our products from the Asia/Pacific region, and net sales increased by 7.5% for the three month period ending June 30, 2014, compared to the same period in 2013, and sales increased by 7.2% for the six months ending June 30, 2014, compared to the same period in 2013.

Additionally, we pre-launched the U^th skin care product in certain Asia/Pacific markets, and these pre-launch activities resulted in over $2.8 million in orders, which are reflected on our June 30, 2014 balance sheet as customer deposits that can be recognized as revenue upon fulfillment in subsequent periods. We paid $0.8 million in commissions on these orders, and at June 30, 2014, these orders generated accrued commission payable of $0.5 million.

Demand for certain products and raw materials remained weak. We took charges to the inventory allowance of $0.8 million and $1.7 million in the three months and six months ending June 30, 2014, respectively, which reduced our gross profit. We are introducing promotions in future months that are intended to minimize future inventory charges; however, these promotions may impact overall profitability (see Results of Operations – Gross Profit below for more information).

 

During the three months ending June 30, 2014, our customers used loyalty points at a higher rate, compared to the prior three quarters.  This has been anticipated as the loyalty points expire one year after vesting.  During the six months ending June 30, 2014, independent associates and members applied $4.6 million to loyalty purchases, and we deferred net sales of $8.3 million for future loyalty redemptions. At June 30, 2014, our deferred revenue balance on our balance sheet was $11.3 million, of which $9.1 million is attributed to the loyalty program.

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Finally, our income tax expense primarily reflects the uneven performance in various markets; however, as we work towards our operations being uniformly profitable, we anticipate that our effective tax rate will decrease. We believe these tax rates are transitional, and we are engaged in additional activity to accelerate top line growth and to ensure all markets contribute to overall profitability (see Results of Operations – (Provision) Benefit for Income Taxes below for more information).

RESULTS OF OPERATIONS

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended June 30, 2014 and 2013 (in thousands, except percentages):

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The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the six months ended June 30, 2014 and 2013 (in thousands, except percentages):

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Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes 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 changes due 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 the prior year’s rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates.

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Consolidated net sales by region for the three months ended June 30, 2014 and 2013 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

Consolidated net sales by customer location for the six months ended June 30, 2014 and 2013 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

Net Sales

Consolidated net sales for the three months ended June 30, 2014 increased by $1.5 million, or 3.4%, to $46.3 million as compared to the same period in 2013. Consolidated net sales for the six months ended June 30, 2014 increased by $2.8 million, or 3.2%, to $89.3 million as compared to the same period in 2013.

North American sales decreased by $0.4 million, or 1.9%, to $20.9 million for the three months ended June 30, 2014 as compared to the same period in 2013. North American sales decreased by $0.6 million to $41.2 million for the six months ended June 30, 2014 as compared to the same period in 2013. The decline in revenue for both the three and six months ended June 30, 2014 as compared to the same periods in 2013 is primarily due to fewer active independent associates and members.

For the three and six months ended June 30, 2014, our operations outside of North America accounted for approximately 54.9% and 53.9%, respectively, of our consolidated net sales, whereas in the same period in 2013, our operations outside of North America accounted for approximately 52.4% and 51.7%, respectively, of our consolidated net sales.

Asia/Pacific sales increased by $1.5 million, or 7.5%, to $21.4 million for the three months ended June 30, 2014 as compared to $19.9 million for the same period in 2013. In constant dollars, net sales would have increased 4.0% to $20.7 million; the currency impact was primarily due to appreciation of the Korean won. Asia/Pacific sales increased by $2.7 million, or 7.2%, to $40.4 million for the six months ended June 30, 2014 as compared to the same period in 2013. For the three and six months ended June 30, 2014, compared to the same period in 2013, the number of active associates increased and also the revenue per active independent associate and member increased.

EMEA sales increased by $0.4 million, or 11.1%, to $4.0 million for the three months ended June 30, 2014 as compared to the same period in 2013, and EMEA sales increased by $0.7 million, or 10.0%, to $7.7 million for the six months ended June 30, 2014 as compared to the same period in 2013. These sales increases were due to increases in active members and associates, partially offset by fluctuations in foreign currency exchange rates and in a decrease in the revenue generated per active associate and member. In constant dollars, net sales for the three months ended June 30, 2014 would have increased 16.7% to $4.2 million, and net sales for the six months ended June 30, 2014 would have increased 18.6% to $8.3 million; the currency impact was primarily due to the South Africa Rand.

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Fluctuation in foreign currency exchange rates for the three months ended June 30, 2014 had an overall favorable impact on our net sales of approximately $0.5 million, as appreciation of the Korean Won was partially offset by depreciation of the Yen, Australian Dollar and South African Rand. For the six months ended June 30, 2014, fluctuation in foreign currency exchange had an overall unfavorable impact on our net sales of approximately $0.7 million, largely attributed to the South African Rand. During this period, in the Asia/Pacific region, gains from a stronger Korean Won were offset by losses from a weaker Yen and Australian Dollar. The net sales impact is calculated as the difference between (1) the current period’s net sales in USD and (2) the current period’s net sales in local currencies converted to USD by applying average exchange rates for the same periods ended June 30, 2013.

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 associates and members;

 

·

changes in competitors’ products;

 

·

changes in economic conditions;

 

·

changes in regulations;

 

·

announcements of new scientific studies and breakthroughs;

 

·

introduction of new products;

 

·

discontinuation of existing products;

 

·

adverse publicity;

 

·

changes in our commissions and incentives programs;

 

·

direct competition; and

 

·

fluctuations in foreign currency exchange rates.

Our sales mix for the three and six months ended June 30, was as follows (in millions, except percentages):

 

Pack sales correlate to new associates who purchase starter packs and to continuing associates who purchase upgrade or renewal packs. However, there is no direct correlation between product sales and the number of new and continuing associates and members because associates and members utilize products at different volumes.

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Product Sales

Substantially all of our product sales are made to associates at published wholesale prices. We also sell our products to members at discounted published retail prices.

Product sales for the three months ended June 30, 2014 decreased $1.7 million or 4.4% from the same period in 2013 primarily because of deferred revenue (see Revenue Recognition and Deferred Commissions in Note 1 of the unaudited consolidated financial statements). The average order value for the three months ended June 30, 2014 was $165 as compared to $153 for the same period in 2013, and this increase in order value resulted in more revenue. The number of orders processed during the three months ended June 30, 2014 decreased by 0.6%, as compared to the same period in 2013.

Product sales for the six months ended June 30, 2014 decreased by $4.5 million, or 5.9%, as compared to the same period in 2014 primarily because of deferred revenue (see Revenue Recognition and Deferred Commissions in Note 1 of the unaudited consolidated financial statements). The average order value for the six months ended June, 2014 was $159, as compared to $153 for the same period in 2013. The 3.9% increase in average order value resulted in more revenue. The number of orders processed during the six months ended June 30, 2014 increased by 0.2%, as compared to the same period in 2013.

Pack Sales

Packs may be purchased by our associates who wish to build a Mannatech business. These packs are offered to our associates at a discount from published retail prices. There are several pack options available to our associates. In certain markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates can also purchase an upgrade pack, which provides the associate with additional promotional materials, additional products, and eligibility for additional commissions and incentives. Many of our business-building associates also choose to purchase renewal packs to satisfy annual renewal requirements to continue to earn various commissions.

The dollar amount of pack sales associated with new and continuing associates was as follows, for the three and six months ended June 30 (in millions, except percentages):

 

Total pack sales for the three months ended June 30, 2014 increased by $3.4 million, or 87.2%, to $7.3 million, as compared to $3.9 million for the same period in 2013. Average pack value for the three months ended June 30, 2014 was $240 as compared to $141 for the same period in 2013. During the three month period ended June 30, 2014, the total number of packs sold increased by 2,700, or 9.7%, to 30,400 and the average pack value increased by $99 to $240, when compared to the period in the prior year. The increase in the average pack value is due to improvements in pack value and an increase in the price of the pack.

Total pack sales for the six months ended June 30, 2014 increased by $7.7 million, or 122.2%, to $14.0 million, as compared to $6.3 million for the same period in 2013. Average pack value for the six months ended June 30, 2014 was $250, as compared to $134 for the same period in 2013. The total number of packs sold increased by 9,300, or 20.0%, to 46,600. The increase in the average pack value is due to improvements in pack value and an increase in the price of the pack.

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Recruiting decreased 13.0% in the second quarter of 2014 as compared to the second quarter of 2013. The number of new independent associates and members for the second quarter of 2014 was approximately 31,500, as compared to 36,200 in 2013. We implemented new incentive programs in major countries during 2014 that changed the incentive program qualification criteria and extended the qualifying period to be longer than the 2013 qualifying period. We believe these changes had a negative impact on the comparability of the recruiting of new associates and members in the second quarter 2014 as compared to the same period in 2013.

The approximate number of new and continuing independent associates and members who purchased our packs or products during the twelve months ended June 30, 2014 and 2013 were as follows:

During 2013 and continuing into 2014, we took the following actions to recruit and retain associates and members:

 

•

explored new international markets;

 

•

launched an aggressive marketing and educational campaign;

 

•

continued to strengthen compliance initiatives;

 

•

concentrated on publishing results of research studies and clinical trials related to our products;

 

•

initiated additional incentives;

 

•

explored new advertising and educational tools to broaden name recognition; and

 

•

implemented changes to our global associate career and compensation plan.

Other Sales

Other sales consisted of: (i) freight revenue charged to our active associates and members; (ii) sales of promotional materials; (iii) monthly fees collected for Success Tracker^TM and Navig8™ customized electronic business-building and educational materials, databases and applications; (iv) training and event registration fees; and (v) a reserve for estimated sales refunds and returns.  Promotional materials, training, database applications and business management tools support our independent associates, which in turn helps stimulate product sales.

For the three months ended June 30, 2014, other sales decreased by $0.2 million, or 10.0%, to $1.8 million, as compared to $2.0 million for the same period in 2013. Other sales for the six months ended June 30, 2014 decreased by $0.4 million, or 10.0%, to $3.6 million, as compared to $4.0 million for the same period in 2013. The decrease was primarily due to a decrease in Success Tracker^TM sales and freight fees charged on our product and pack shipments, which was offset by an increase in sales refunds.

Gross Profit

During the three months ended June 30, 2014, gross profit increased by $0.5 million, or 1.3%, to $36.6 million, as compared to $36.1 million for the same period in 2013 primarily because of increasing sales. For the three months ended June 30, 2014, gross profit as a percentage of net sales decreased to 79.0%, as compared to 80.6% for the same period in 2013. The Company took a charge to allowance for obsolete inventory of $0.8 million during the second quarter, which was attributed to $0.5 million for raw materials and $0.3 million for finished goods. During the same period 2013, the charge for allowance for obsolete inventory was $0.1 million.

For the six months ended June 30, 2014 and 2013, gross profit was $70.1 million. For the six months ended June 30, 2014, gross profit as a percentage of net sales decreased to 78.6%, as compared to 81.0% for the same period in 2013. The reduction in gross profit was the charge to allowance for obsolete inventory in the second quarter plus a charge for obsolete inventory during the first quarter of $0.9 million that was attributed to $0.4 million for raw materials and $0.5 million for finished goods. During the same six month period in 2013, the charge for allowance for obsolete inventory was $0.2 million.

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Commission and Incentives

Commission costs for the three months ended June 30, 2014 increased by 5.6%, or $1.0 million, to $18.8 million, as compared to $17.8 million for the same period in 2013. The increase in commissions was due to the increase in commissionable net sales. For the three months ended June 30, 2014, commissions as a percentage of net sales increased to 40.6% from 39.9% for the same period in 2013 due to the commission expense on the U^th pre-launch in certain Asia/Pacific markets (see Current Economic Conditions and Recent Developments.)

Commission costs for the six months ended June 30, 2014 increased $0.6 million to $35.2 million, compared to $34.6 million for the same period in 2013. For the six months ended June 30, 2014, commissions as a percentage of net sales decreased to 39.5% from 40.0% for the same period in 2013.

Incentive costs for the three months ended June 30, 2014 decreased by $0.3 million, to $1.0 million, as compared to $1.3 million for the same period in 2013. The costs of incentives as a percentage of net sales decreased during this period to 2.2% from 2.9% for the same period in 2013.

Incentive costs for the six months ended June 30, 2014 decreased $0.6 million, to $1.5 million, as compared to $2.1 million for the same period in 2013. The costs of incentives as a percentage of net sales decreased during this period to 1.7%, as compared to 2.5% for the same period in 2013.

Selling and Administrative Expenses

Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events.

For the three months ended June 30, 2014, selling and administrative expenses increased by $0.4 million, or 4.7%, to $8.9 million, as compared to $8.5 million for the same period in 2013 due to increased marketing costs. Selling and administrative expenses as a percentage of net sales for the three months ended June 30, 2014 increased to 19.3% from 19.1% for the same period in 2013.

For the six months ended June 30, 2014, selling and administrative expenses decreased by $0.4 million, or 2.0%, to $16.8 million, as compared to $17.2 million for the same period in 2013. The decrease in selling and administrative expenses consisted primarily of a decrease in payroll and payroll-related costs of $0.8 million which was offset by an increase in marketing costs of $0.3 million and stock-based compensation expense of $0.2 million. Selling and administrative expenses as a percentage of net sales for the six months ended June 30, 2014 decreased to 18.8% from 19.9% for the same period in 2013.

Other Operating Costs

Other operating costs include travel, accounting, legal and consulting fees, credit card processing fees, banking fees, off-site storage fees, utilities, and other miscellaneous operating expenses. Changes in other operating costs are associated with changes in our net sales.

For the three months ended June 30, 2014, other operating costs increased by $0.6 million, or 9.1%, to $6.8 million, as compared to $6.2 million for the same period in 2013. For the three months ended June 30, 2014, other operating costs as a percentage of net sales increased to 14.7% from 13.9% for the same period in 2013. For the six months ended June 30, 2014, other operating costs increased by $1.0 million, or 8.0%, to $13.8 million, as compared to $12.8 million for the same period in 2013. For the six months ended June 30, 2014, other operating costs as a percentage of net sales increased to 15.4% from 14.7% for the same period in 2013. For the three and six month periods ending June 30, 2014, the increase in other operating costs were primarily due to the office and credit card expenses.

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Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended June 30, 2014 decreased to $0.4 million, as compared to $0.6 million for the same period in 2013. As a percentage of net sales, depreciation and amortization expense was 0.9%, as compared to 1.3% for the same period in 2013.

Depreciation and amortization expense for the six months ended June 30, 2014 decreased to $0.8 million, as compared to $1.2 million for the same period in 2013. As a percentage of net sales, depreciation and amortization expense was 0.9%, as compared to 1.4% for the same period in 2013.

Other Income (Expense), Net

Other income (expense), net primarily consists of foreign currency gains and losses related to the remeasurement of our foreign subsidiaries’ assets, liabilities, revenues, and expenses to the United States Dollar and revaluing monetary accounts in the United States, Switzerland, Japan, Republic of Korea, Taiwan, Norway, Sweden, and Mexico using current and weighted-average currency exchange rates. Net foreign currency transaction gains and losses are the result of the United States dollar fluctuating in value against foreign currencies.

Other income (expense), net for the three months ended June 30, 2014 was $0.2 million, as compared to other income (expense), net of ($1.4) million for the same period in 2013; the improvement in other income is due to foreign currency exchange during the three months ended June 30, 2014, as compared to the same period in 2013.

Other income (expense), net for the six months ended June 30, 2014 was ($0.1) million, as compared to other income, net of ($1.0) million for the same period in 2013, the improvement in other expense is associated with foreign currency exchange during the six months ended June 30, 2014, as compared to the same period in 2013.

(Provision) Benefit for Income Taxes

(Provision) benefit for income taxes includes current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows for the three and six months ended June 30:

 

Country	2014		2013
Australia	30.0%		30.0%
Canada	26.5%		26.5%
Denmark	24.5%		25.0%
Japan	39.4%		39.4%
Mexico	30.0%		30.0%
Norway	27.0%		28.0%
Republic of Korea	22.0%		22.0%
Singapore	17.0%		17.0%
South Africa	28.0%		28.0%
Sweden	22.0%		22.0%
Switzerland	16.2%		16.2%
Taiwan	17.0%		17.0%
United Kingdom	21.0%		23.0%
United States	37.5%		37.5%
Cyprus	12.5%		12.5%
Hong Kong	16.5%		16.5%
Ukraine	18.0%		19.0%
Gibraltar	10.0%		--

 

Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States.

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We use the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes, to account for income taxes. The provisions of the Income Tax Topic require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction.

For each of the periods ended June 30, 2014 and December 31, 2013, we maintained the following valuation allowances for deferred tax assets totaling  $5.5 million as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in FASB ASC Topic 740, cannot be met (in millions):