MANNATECH, INCORPORATED The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the two years endedDecember 31, 2022 and 2021. This discussion should be read in conjunction with "Item 15. - Consolidated Financial Statements" beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includesMannatech and all of our subsidiaries on a consolidated basis. Refer to the Non-GAAP Financial Measure section herein for a description of how Constant dollar ("Constant dollar") growth rate (a Non-GAAP financial metric) is determined. COMPANY OVERVIEWMannatech is a global wellness solution provider, which was incorporated and began operations inNovember 1993 . We develop and sell innovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) theAmericas (the United States ,Canada andMexico ); (ii)Europe /theMiddle East /Africa ("EMEA") (Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,Namibia ,the Netherlands ,Norway ,South Africa ,Spain ,Sweden and theUnited Kingdom ); and (iii)Asia/Pacific (Australia ,Japan ,New Zealand , theRepublic of Korea ,Singapore ,Taiwan ,Hong Kong , andChina ). We also ship our products to customers in the following countries:Belgium ,France ,Greece ,Italy , Luxembourg, andPoland . We conduct our business as a single reporting segment and primarily sell our products through a network of approximately 145,000 active associates and preferred customer positions held by individuals that purchased our products and/or packs or paid associate fees during the last 12 months, who we refer to as current associates and preferred customers. New pack sales and the receipt of new associate fees in connection with new positions in our network are leading indicators for the long-term success of our business. New associate or preferred customer positions are created in our network when our associate fees are paid or packs and products are purchased for the first time under a new account. We operate as a seller of nutritional supplements, topical and skin care and anti-aging products, and weight-management products through our network marketing distribution channels operating in 24 countries and direct e-commerce retail inChina . 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 current associates and preferred customers that occupy sales or purchasing positions in our network; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure. Our subsidiary inChina , Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business inChina unless it acquires a direct selling license inChina .
Current Economic Conditions and Recent Developments
Overall net sales decreased$22.6 million , or 14.1%, for 2022, as compared to 2021. Our 2022 net sales declined$12.1 million , or 7.6%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a$10.5 million decrease in GAAP net sales as compared to 2021. 41 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
Year Ended
The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years endedDecember 31, 2022 and 2021 (in thousands, except percentages). 2022 2021 Change Total % of Total % of Dollars net sales Dollars net sales Dollar Percentage Net sales$ 137,208 100.0 %$ 159,762 100.0 %$ (22,554) (14.1) % Cost of sales 33,060 24.1 % 34,149 21.4 % (1,089) (3.2) % Gross profit 104,148 75.9 % 125,613 78.6 % (21,465) (17.1) % Operating expenses: Commissions and incentives 55,483 40.4 % 63,784 39.9 % (8,301) (13.0) % Selling and administrative expenses 27,470 20.0 % 29,427 18.4 % (1,957) (6.7) % Depreciation and amortization 1,627 1.2 % 1,719 1.0 % (92) (5.4) % Other operating costs 19,973 14.6 % 21,634 13.5 % (1,661) (7.7) % Total operating expenses 104,553 76.2 % 116,564 73.0 % (12,011) (10.3) % (Loss) income from operations (405) (0.3) % 9,049 5.7 % (9,454) (104.5) % Interest income 88 0.1 % 66 - % 22 33.3 % Other (expense) income, net (162) (0.1) % (223) (0.1) % 61 27.4 % (Loss) income before income taxes (479) (0.3) % 8,892 5.6 % (9,371) 105.4 % Income tax (provision) benefit (4,011) (2.9) % 950 0.6 % (4,961) (522.2) % Net (loss) income$ (4,490) (3.3) %$ 9,842 6.2 %$ (14,332) 145.6 % Non-GAAP Financial Measures To supplement our financial results presented in accordance with generally accepted accounting principles inthe United States ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies intoU.S. dollars, including changes in:Net Sales , Gross Profit, and Income (loss) from Operations. We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends. To exclude the impact of changes due to the translation of foreign currencies intoU.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. 2022 2021 Constant Dollar Change GAAP Non-GAAP GAAP Measure: Measure: Measure: Total $ Constant $ Total $ Dollar Percent Net sales$ 137.2 $ 147.7 $ 159.8 $ (12.1) (7.6) % Product$ 130.2 $ 140.0 $ 151.0 $ (11.0) (7.3) % Pack and associate fees$ 6.2 $ 6.9 $ 8.0 $ (1.1) (13.8) % Other$ 0.8 $ 0.8 $ 0.8 $ - - % Gross profit$ 104.1 $ 112.4 $ 125.6 $ (13.2) (10.5) % (Loss) income from operations$ (0.4) $ 1.9 $ 9.0 $ (7.1) (78.9) % 42
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Consolidated net sales by region for the years ended
2022 2021
Americas $ 41.6 30.3 % $ 46.8 29.3 %
Asia/Pacific 83.8 61.1 % 97.7 61.1 %
EMEA 11.8 8.6 % 15.3 9.6 %
Total $ 137.2 100.0 % $ 159.8 100.0 %
Consolidated domestic and foreign net sales for the years ended
2022 2021
Domestic $ 29.8 21.7 % $ 35.0 21.9 %
Foreign 107.4 78.3 % 124.8 78.1 %
Total $ 137.2 100.0 % $ 159.8 100.0 %
Net Sales
Overall net sales decreased by
Sales for theAmericas decreased by$5.2 million , or 11.1%, to$41.6 million for 2022 as compared to$46.8 million for the same period in 2021 as we worked through an unprecedented supply challenge that put a headwind on recruiting and contributed to a 10.0% decline in the number of active independent associates and preferred customers, which was partially offset by 1.3% increase in revenue per active independent associate and preferred customer. During 2022,Asia/Pacific sales decreased by$13.9 million , or 14.2%, to$83.8 million as compared to$97.7 million for 2021. Foreign currency exchange had the effect of decreasing revenue by$9.3 million for the year endedDecember 31, 2022 , as compared to the same period in 2021 and partially explains the 10.4% decrease in revenue per active independent associate and preferred customer. The currency impact is primarily due to the weakening of the Korean Won, Japanese Yen and Australian Dollar. The numbers of active independent associates and preferred customers decreased 6.9%. During 2022, EMEA sales decreased by$3.5 million , or 22.9%, to$11.8 million as compared to$15.3 million for 2021. This decrease was primarily due to a 25.9% decrease in the number of active independent associates and preferred customers, which was partially offset by a 0.6% increase in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of decreasing revenue by$1.2 million for the year endedDecember 31, 2022 as compared to the same period in 2021. The currency impact is primarily due to the weakening of the South African Rand, British Pound and Euro. Our sales mix for the years endedDecember 31 , was as follows (in millions, except percentages): Change 2022 2021 Dollar Percentage Consolidated product sales$ 130.2 $ 151.0 $
(20.8) (13.8) %
Consolidated pack sales and associate fees 6.2 8.0
(1.8) (22.5) %
Consolidated other 0.8 0.8 - - % Total consolidated net sales$ 137.2 $ 159.8 $ (22.6) (14.1) % 43
-------------------------------------------------------------------------------- Table of Contents Product Sales Our product sales are made to our independent associates and preferred customers at published wholesale prices. Product sales for the year endedDecember 31, 2022 decreased by$20.8 million , or 13.8%, to$130.2 million , as compared to$151.0 million for the same period in 2021. The decrease in product sales was primarily due to a decrease in the average order value. The average order value in 2022 was$175 , as compared to$190 for the same period in 2021. The number of orders processed during the year endedDecember 31, 2022 decreased by 5.6% as compared to the same period in 2021.
Pack Sales and Associate Fees
The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year. The Company collected associate fees in lieu of pack sales withinthe United States ,Canada ,South Africa ,Japan ,Australia ,New Zealand ,Singapore ,Hong Kong ,Taiwan ,Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,the Netherlands ,Norway ,Spain ,Sweden and theUnited Kingdom . In theRepublic of Korea andMexico , packs may still be purchased by our associates who wish to build aMannatech business. These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. Pack sales may be completed during the final stages of the registration process, entitling the Associates to earn commissions, benefits, and incentives for that year. These packs can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials. We also do not collect associate fees or sell packs in our non-direct selling business in mainlandChina . The dollar amount of pack sales and associate fees associated with new and continuing independent associate positions held by individuals in our network was as follows, for the years endedDecember 31 (in millions, except percentages): Change 2022 2021 Dollar Percentage New$ 0.4 $ 0.5 $ (0.1) (20.0) % Continuing 5.8 7.5 (1.7) (22.7) % Total$ 6.2 $ 8.0 $ (1.8) (22.5) %
Total pack sales and associate fees for the year ended
During 2022 and continuing into 2023, we took the following actions in an effort to increase the number of independent associates and preferred customers:
•registered our most popular products with the appropriate regulatory agencies in all countries of operations where possible;
•rolled out new products;
•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.
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The approximate number of active new and continuing active associates and
preferred customers who purchased our packs or products or paid associate fees
during the twelve months ended December 31 was as follows:
2022 2021
New 75,000 51.7 % 84,000 51.5 %
Continuing 70,000 48.3 % 79,000 48.5 %
Total 145,000 100.0 % 163,000 100.0 %
Other Sales
Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees
collected for the Success Tracker™ and Mannatech+ customized electronic
business-building and educational materials, databases and applications; (iii)
training and event registration fees; and (iv) a reserve for estimated sales
refunds and returns. Promotional materials, training, database applications and
business management tools to support our independent associates, which in turn
helps stimulate product sales.
For the years ended
Gross Profit For the year endedDecember 31, 2022 , gross profit decreased by$21.5 million , or 17.1%, to$104.1 million , as compared to$125.6 million for the same period in 2021. Gross profit as a percentage of net sales decreased to 75.9% for 2022, as compared to 78.6% for 2021 due to the impacts of foreign exchange (mostly Korea Won and Japanese Yen), and rising costs in our supply chain.
Commission and Incentives
As sales declined, commission expenses decreased for the year endedDecember 31, 2022 , by 14.8%, or$9.1 million to$52.5 million , as compared to$61.6 million for the same period in 2021. Commissions as a percentage of net sales were 38.2% for the year endingDecember 31, 2022 and 38.5% for the same period in the prior year. Incentive costs increased for the year endedDecember 31, 2022 by 36.4%, or$0.8 million , to$3.0 million as compared to$2.2 million for the same period in 2021. The costs of incentives, as a percentage of net sales increased to 2.2% for the year endedDecember 31, 2022 , as compared to 1.4% for the same period in 2021. This increase was related to travel incentives in theAmericas andAsia/Pacific .
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.
For the year endedDecember 31, 2022 , overall selling and administrative expenses decreased by$1.9 million , or 6.7%, to$27.5 million , as compared to$29.4 million for the same period in 2021. The decrease in selling and administrative expenses consisted of a$1.1 million decrease in payroll costs, a$0.5 million decrease in marketing costs and a$0.3 million decrease in distribution costs. Other Operating Costs
Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.
For the year endedDecember 31, 2022 , other operating costs decreased by$1.6 million , or 7.7%, to$20.0 million , as compared to$21.6 million for the same period in 2021. For the year endedDecember 31, 2022 , other operating costs, as a percentage of net sales, were 14.6%, as compared to 13.5% for the same period in 2021. The decrease was due to a$0.7 million decrease in credit card fees, the resolution of the Korea Customs Audit (see Note 11, Commitments and Contingencies) for a$0.4 million lower cost than we expected, and a$0.3 million decrease in bad debt expense, and lower professional fees. 45 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Expense
For the years ended
Other (Expense) Income, net
Primarily due to foreign exchange losses, other expense was
Provision for Income Taxes
Provision for income taxes include current and deferred income taxes for both
our domestic and foreign operations. Our statutory income tax rates by
jurisdiction are as follows, for the years ended
Country 2022 2021 Australia 30.0 % 30.0 % Bermuda - % - % Canada 26.5 % 26.5 % China(1) 25.0 % 5.0 % Colombia(2) 35.0 % 31.0 % Cyprus 12.5 % 12.5 % Denmark 22.0 % 22.0 % Gibraltar(3) 12.5 % 11.3 % Hong Kong 16.5 % 16.5 % Japan 34.6 % 34.6 % Mexico 30.0 % 30.0 % Netherlands(4) 25.8 % - % Norway 22.0 % 22.0 % Republic of Korea 22.0 % 22.0 % Russia(5) 20.0 % 20.0 % Singapore 17.0 % 17.0 % South Africa 28.0 % 28.0 % Sweden 20.6 % 20.6 % Switzerland(6) 9.2 % 9.2 % Taiwan 20.0 % 20.0 % Ukraine(7) 18.0 % 18.0 % United Kingdom 19.0 % 19.0 % United States(8) 23.2 % 23.2 %
(1)For 2021, the Company qualified for a reduced 5% tax rate in
qualified for the reduced rate and is now taxed at the full 25% rate due to increased earnings. (2)OnNovember 1, 2019 , the Company suspended operations inColombia , but maintained the legal entity, Mannatech Colombia SAS. During Q2 2022, the Company liquidated the entity. (3)The Company paid taxes at 10% forGibraltar earnings untilAugust 1, 2021 , and 12.5% fromAugust 1, 2021 onward. (4)OnSeptember 13, 2022 , the Company established a legal entity inthe Netherlands calledMannatech Netherlands BV . (5)OnAugust 1, 2016 , the Company established a legal entity inRussia calledMannatech RUS Ltd. , but currently does not operate inRussia . (6)OnJuly 1, 2019 , the Company suspended operations inSwitzerland , but maintains the legal entity. (7)OnMarch 21, 2014 , the Company suspended operations in theUkraine , but maintains the legal entity,Mannatech Ukraine LLC . (8)Includes blended state effective rate of 2.2% for 2022 and 2021 in addition to theU.S federal statutory rate of 21%. 46 -------------------------------------------------------------------------------- Table of Contents Foreign Tax 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 inthe United States , we may not be able to fully utilize our foreign income tax credits inthe United States .U.S. Tax For each of the years endedDecember 31, 2022 and 2021, the Company's effective tax rate was (837.4)% and (10.7)%, respectively. In 2022, the Company's effective tax rate differed from the statutory rate due to additional taxes assessed as a result of the settlement of the income tax audit inKorea , the Company recording a valuation allowance onU.S. deferred tax assets largely driven by changes in expected earnings mix between jurisdictions and the relative impact of these items on decreased earnings. In 2021, the Company's effective rate differed from the statutory rate due to the effect of changes in valuation allowances recorded in certain jurisdictions, taking the IRC Section 250 deduction and applying tax credits. AtDecember 31, 2022 and 2021, the Company's valuation allowance was$9.8 million and$7.9 million , respectively. The provisions of Accounting Standards Codification Topic 740, Income Taxes ("ASC Topic 740") require a company to record a valuation allowance when the "more likely than not" criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.
The valuation allowance against the Company's deferred tax assets consisted of
the following at
Country 2022 2021
China $ 0.4 $ 0.5
Colombia - 0.5
Cyprus 0.2 0.2
Mexico 1.8 1.9
Norway 0.1 0.1
South Africa 0.2 0.2
Switzerland 0.3 0.5
Taiwan 0.6 0.6
United States 6.2 3.4
Total $ 9.8 $ 7.9
SEASONALITY
We believe the impact of seasonality on our consolidated results of operations
is minimal. We have experienced and believe we will continue to experience
variations on our quarterly results of operations in response to, among other
things:
•the timing of the introduction of new products and incentives;
•our ability to attract and retain associates and preferred customers;
•the timing of our incentives and contests;
•the general overall economic outlook;
•government regulations;
•global pandemic;
•the outcome of certain lawsuits;
•the perception and acceptance of network marketing; and
•the consumer perception of our products and overall operations.
As a result of these and other factors, our quarterly results may vary
significantly in the future. Period-to-period comparisons should not be relied
upon as an indication of future performance since we can give no assurances that
revenue trends in new markets, as well as in existing markets, will follow our
historical patterns. The market price of our common stock may also be adversely
affected by the above factors.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
As ofDecember 31, 2022 , our cash and cash equivalents and restricted cash decreased by 40.7%, or$10.4 million , to$15.2 million from$25.6 million as ofDecember 31, 2021 . The Company is required to restrict cash for (i) direct selling insurance premiums and credit card sales in theRepublic of Korea ; (ii) reserve on credit card sales inthe United States andCanada ; and (iii)Australia building lease collateral. The current portion of restricted cash at each ofDecember 31, 2022 and 2021 was$0.9 million . Fluctuations in currency rates produced a decrease of$2.4 million in cash and cash equivalents in 2022 as compared to a decrease of$2.7 million in 2021. Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends. We fund our business objectives, operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt. Working Capital Working capital represents total current assets less total current liabilities. AtDecember 31, 2022 , our working capital decreased by$7.6 million , or 59.8%, to$5.1 million
from
Net Cash Flows
Our net consolidated cash flows consisted of the following, for the years ended
Provided by / (used in): 2022 2021
Operating activities $ (2.6) $ 10.8
Investing activities $ (1.1) $ (0.7)
Financing activities $ (4.3) $ (9.3)
Operating Activities
Cash provided by operating activities decreased by $13.4 million for the year
ended December 31, 2022 , as compared to the same period in 2021. For the year
ended December 31, 2022 , this decrease was due to an operating loss and cash
invested in inventory.
Investing Activities
During the year ended
Financing Activities
For the year endedDecember 31, 2022 , our financing activities used cash of$4.3 million compared to cash used of$9.3 million for the same period of 2021. For the year endedDecember 31, 2022 , we used approximately$0.8 million in the repayment of finance lease obligations and other long term liabilities,$1.5 million in the payment of dividends to shareholders, and$2.0 million in the repurchase of common stock. For the year endedDecember 31, 2021 , we used approximately$0.4 million in the repayment of finance lease obligations and other long term liabilities,$4.3 million in the payment of dividends to shareholders, and$5.1 million for the repurchase of common stock, which was partially offset by$0.5 million cash provided by the exercise of stock options. 48 -------------------------------------------------------------------------------- Table of Contents General Liquidity and Cash Flows
Short Term Liquidity
We believe our existing liquidity and cash flows from operations are adequate to fund our normal expected future business operations for the next 12 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 improve revenue 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, 2022 and 2021, cash and cash equivalents held in bank accounts in foreign countries totaled$11.3 million and$22.6 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 to predict whether we will incur any liability, or to estimate the ranges of damages, if any, in connection with these matters. Adverse outcomes on these uncertainties may lead to substantial liability or enforcement actions that could adversely affect our cash position. TheCanada Revenue Agency is auditing the Company's GST filings fromJanuary 2019 throughApril 2021 . Management believes the likelihood of an additional GST liability or penalty from the audit is remote and therefore has not accrued a liability related to this audit atDecember 31, 2021 . For more information see Note 1, Organization and Summary of Significant Accounting Policies, Note 7, Income Taxes, Note 11, Commitments and Contingencies, and Note 12, Litigation to our Consolidated Financial Statements. We have contractual purchase commitments with certain raw material suppliers to purchase minimum quantities and to ensure exclusivity of our raw materials and the proprietary nature of our products. AtDecember 31, 2022 , we have one supply agreement that requires the Company to purchase an aggregate of$7.9 million through 2024, with no purchase commitments thereafter. We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and help ensure quality control standards. These agreements do not require us to purchase any minimum quantities. We have no present commitments or agreements with respect to acquisitions or purchases of any manufacturing facilities; however, management from time to time explores the possibility of the benefits of purchasing a raw material manufacturing facility to help control costs of our raw materials and help ensure quality control standards. We have operating lease liabilities for the property and equipment we use in our business operations. These operating lease liabilities represent our minimum future payment obligations on operating leases, including imputed interest. AtDecember 31, 2022 , our operating lease liabilities were$5.8 million , of which$1.6 million was recorded in Accrued expenses and$4.2 million was recorded in Other long-term liabilities. We also have finance lease liabilities of$0.2 million and lease restoration liabilities of$0.3 million .
We have a pension obligation of
In recent years, as we have responded to COVID-19, we have taken steps to protect the health, safety and well-being of our customers, associates, employees, and communities by closing some offices and equipping various staff members to work remotely. The Company depends on an independent salesforce of distributors to market and sell its products to consumers. Developments such as social distancing and shelter-in-place directives has impacted their ability to engage with potential and existing customers. The adverse economic effects of COVID-19 include government restriction and changes in consumer demand for the Company's products. The Company has rescheduled corporate sponsored events, and in some cases, our associates have canceled sales meetings. Prolonged workforce disruptions, continued disruption in our supply chain, and potential decreases in consumer demands could negatively impact our sales as well as the Company's overall liquidity in the next twelve months, however, such impact is currently unknown.
Long Term Liquidity
We believe our cash flows from operations should be adequate to fund our normal
expected future business operations and possible international expansion costs
for the long term. As our primary source of liquidity is from our cash flows
from operations, this will be dependent on our ability to maintain 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, we may be
required to raise additional funds, which may not be available on favorable
terms, if at all.
Our future access to the capital markets may be adversely impacted if we fail to
maintain compliance with the Nasdaq Marketplace Rules for the continued listing
of our stock. We continuously monitor our compliance with the Nasdaq continued
listing rules.
49-------------------------------------------------------------------------------- Table of Contents OFF-BALANCE SHEET ARRANGEMENTS
We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements.
MARKET RISKS
Please see "Quantitative and Qualitative Disclosure about Market Risk" under Item 7A of this Form 10-K for additional information about our Market Risks.
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CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. The
application of GAAP requires us to make estimates and assumptions that involve a
significant level of estimation uncertainty and have had or are reasonably
likely to have a material impact on the financial condition or results of
operations of Mannatech at the date of our financial statements. We use
estimates throughout our financial statements, which are influenced by
management's judgment and uncertainties. Our estimates are based on historical
trends, industry standards, and various other assumptions that we believe are
applicable and reasonable under the circumstances at the time the consolidated
financial statements are prepared. Our Audit Committee reviews our critical
accounting policies and estimates. We continually evaluate and review our
policies related to the portrayal of our consolidated financial position and
consolidated results of operations that require the application of significant
judgment by our management. We also analyze the need for certain estimates,
including the need for such items as allowance for doubtful accounts, inventory
reserves, long-lived fixed assets and capitalization of internal-use software
development costs, reserve for uncertain income tax positions and tax valuation
allowances, revenue recognition, sales returns, and deferred revenues,
accounting for stock-based compensation, and contingencies and litigation.
Historically, actual results have not materially deviated from our estimates.
However, we caution readers that actual results could differ from our estimates
and assumptions applied in the preparation of our consolidated financial
statements. If circumstances change relating to the various assumptions or
conditions used in our estimates, we could experience an adverse effect on our
financial position, results of operations, and cash flows. We have identified
the following applicable critical accounting policies and estimates as of
December 31, 2022 :
Inventory Reserves
Inventory consists of raw materials, finished goods, and promotional materials
that are stated at the lower of cost (using standard costs that approximate
average costs) or net realizable value. We record the amounts charged by the
vendors as the costs of inventory. Typically, the net realizable value of our
inventory is higher than the aggregate cost. Determination of net realizable
value can be complex and, therefore, requires a high degree of judgment. In
order for management to make the appropriate determination of net realizable
value, the following items are considered: inventory turnover statistics,
current selling prices, seasonality factors, consumer demand, regulatory
changes, competitive pricing, and performance of similar products. If we
determine the carrying value of inventory is in excess of estimated net
realizable value, we write down the value of inventory to the estimated net
realizable value.
We also review inventory for obsolescence in a similar manner and any inventory
identified as obsolete is reserved or written off. Our determination of
obsolescence is based on assumptions about the demand for our products, product
expiration dates, estimated future sales, and general future plans. We monitor
actual sales compared to original projections, and if actual sales are less
favorable than those originally projected by us, we record an additional
inventory reserve or write-down. Historically, our estimates have been close to
our actual reported amounts. However, if our estimates regarding inventory
obsolescence are inaccurate or consumer demand for our products changes in an
unforeseen manner, we may be exposed to additional material losses or gains in
excess of our established estimated inventory reserves. At each of December 31,
2022 and 2021, our inventory reserves were $0.4 million .
Uncertain Income Tax Positions and Tax Valuation Allowances
As required by ASC Topic 740, we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions. We base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will "more likely than not" be sustained in an income tax audit. We are also subject to periodic audits from multiple domestic and foreign tax authorities related to income tax and other forms of taxation. These audits examine our tax positions, timing of income and deductions, 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 of limitations expires or before an issue is resolved by the taxing authority. Additionally, we may be requested to extend the statute of limitations for tax years under audit. It is reasonably possible the tax jurisdiction may request that the statute of limitations be extended, which may cause the classification between current and long-term to change. We believe 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 ongoing income tax audits in various international jurisdictions that we believe are not material to our financial statements. As ofDecember 31, 2022 , there was nothing recorded in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions. 51 -------------------------------------------------------------------------------- Table of Contents We also review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, future management plans, and current economic information to evaluate the amount of valuation allowance to record. As ofDecember 31, 2022 , we maintained a valuation allowance for deferred tax assets arising from our operations of$9.8 million because they did not meet the "more likely than not" criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as ofDecember 31, 2022 , we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling$1.5 million , which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution. Transfer Pricing In many countries, including theU.S. , we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by ourU.S. and foreign entities and are taxed accordingly. In the normal course of business, we are audited by federal, state and foreign tax authorities, and subject to inquiries from those tax authorities regarding the amount of taxes due. These inquiries may relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe that our tax positions comply with applicable tax law and intend to defend our positions, if necessary. Our effective tax rate in each financial statement period could be impacted if we prevailed in matters for which reserves have been established, or were required to pay amounts more than established reserves. Revenue Recognition Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. We recognize revenue from shipped packs and products upon receipt by the customer. We estimate order delivery dates using weighted averages of historical delivery data periodically provided by our freight carriers. Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (a) the sale of the product and (b) the loyalty program. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. The transaction price is allocated between the product sale and the loyalty program on a relative standalone selling price basis. Sales placed through a one-time order contain only the first performance obligation noted above - the sale of the product. The Company provides associates with access to a complimentary three-month package for the Success TrackerTM and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations: (a) the associate fee, whereby the Company provides an associate with the right to earn commissions, bonuses and incentives for a year, (b) three months of complimentary access to utilize the Success Tracker™ online tool and (c) three months of complimentary access to utilize the Mannatech+ online business tool. The transaction price is allocated between the three performance obligations on a relative standalone selling price basis. Associates do not have complimentary access to online business tools after the first contractual period.
With regard to both of the aforementioned contracts, the Company determines the standalone selling prices by using observable inputs which includes the Company's standard published price lists.
Product Return Policy
We stand behind our products and believe we offer a reasonable and industry-standard product return policy to all of our customers. We do not resell returned products. Refunds are not processed until proper approval is obtained. Refunds are processed and returned in the same form of payment that was originally used in the sale. Each country in which we operate has specific product return guidelines. However, we allow our associates and preferred customers to exchange products as long as the products are unopened and in good condition. Our return policies for our retail customers and our associates and preferred customers 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 the product and receive a full cash refund from the associate for the first 180 days following the product's purchase if located inthe United States andCanada , and for the first 90 days following the product's purchase in other countries where we sell our products. The associate may return or exchange the product based on the associate product return policy. InChina , where we sell our products under a cross-border e-commerce model, we have a 14-day return policy. 52
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•Associate and Preferred Customer Product Return Policy. This policy allows the associate or preferred customer to return an order within one year of the purchase date upon terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% restocking fee. We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies inthe United States andCanada , only for the first 180 days following the product's purchase, and applies in other countries where we sell our products for the first 90 days following the product's purchase; however, any commissions earned by an associate will be deducted from the refund. If we discover abuse of the refund policy, we may terminate the associate's or preferred customer's account. The Company utilizes the expected value method, as set forth by ASC Topic 606, to estimate the sales returns and allowance liability by taking the weighted average of the sales return rates over a rolling six-month period. The Company allocates the total amount recorded within the sales return and allowance liability as a reduction of the overall transaction price for the Company's product sales. The Company deems the sales refund and allowance liability to be a variable consideration. The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC Topic 606.
Accounting for Stock-Based Compensation
We grant stock options to our employees, board members, and consultants. At the date of grant, we determine the fair value of a stock option award and recognize compensation expense over the requisite service period, or the vesting period of such stock option award, which is two or three years. The fair value of the stock option award is calculated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires us to apply judgment and use highly subjective assumptions, including expected stock option life, expected volatility, expected average risk-free interest rates, and expected forfeiture rates. For the year endedDecember 31, 2022 , our assumptions and estimates used to determine the fair value of stock options granted in 2022 were as follows: 2022 Grants May June Estimated fair value per share of options granted:$ 9.93 $ 6.72 Assumptions: Dividend yield 2.6 % 3.9 % Risk-free interest rate 2.9 % 3.4 % Expected market price volatility 63.6 % 64.9 % Average expected life of stock options (in years) 4.5 4.5 Historically, our estimates and underlying assumptions have not materially deviated from our actual reported results and rates. However, we base assumptions we use on our best estimates, which involves inherent uncertainties based on market conditions that are outside of our control. If actual results are not consistent with the assumptions we use, the stock-based compensation expense reported in our consolidated financial statements may not be representative of the actual economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our estimated forfeitures, we may be required to adjust our consolidated financial statements in future periods. As ofDecember 31, 2022 , using our current assumptions and estimates, we anticipate recognizing less than$0.1 million in gross compensation expense through 2023 related to unvested stock options outstanding. If we grant additional stock options in the future, we would be required to recognize additional compensation expense over the vesting period of such stock options in our consolidated statement of operations. As ofDecember 31, 2022 , we had 126,276 shares available for grant in the future.
Contingencies and Litigation
Each quarter, we evaluate the need to establish a reserve for any legal claims or assessments. We base our evaluation on our best estimates of the potential liability in such matters. The legal reserve would include an estimated amount for any damages and the probability of losing any threatened legal claims or assessments. No legal reserve was deemed necessary atDecember 31, 2022 . The legal reserve is developed in consultation with our general and outside counsel and is based upon a combination of litigation and settlement strategies. Although we believe that our legal reserves and accruals are based on reasonable judgments and estimates, actual results could differ, which may expose us to material gains or losses in future periods. If actual results differ, if circumstances change, or if we experience an unanticipated adverse outcome of any legal action, including any claim or assessment, we would be required to recognize the estimated amount that could reduce net income, earnings per share, and cash flows. 53 -------------------------------------------------------------------------------- Table of Contents We resolved the Busan Customs Office audit ofKorea customs values for a$0.4 million lower cost than we accrued last year. As we process commissions monthly, Mannatech Korea receives fromMannatech Inc. payments for members' commissions and these intercompany payments are settled by way of netting set-off with other transactions. We are seeking an official ruling from theMinistry of Economy and Finance involving the netting of receivables / payables in foreign currency between a Korean resident and a non-resident and whether this should be reported to theBank of Korea or a designated foreign exchange bank under compliance with the Foreign Exchange Transactions Act ("FETA") ofKorea . If it is confirmed in the ruling that the above transactions are subject to the advance reporting requirement under the FETA, there is a possibility of a penalty for the violation. 54 -------------------------------------------------------------------------------- Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk We do not engage in trading market risk sensitive instruments and do not purchase investments as hedges or for purposes "other than trading" that are likely to expose us to certain types of market risk, including interest rate, commodity price, or equity price risk. Although we have investments, we believe there has been no material change in our exposure to interest rate risk. We have not issued any debt instruments, entered into any forward or futures contracts, purchased any options, or entered into any swap agreements. We are exposed, however, to other market risks, including changes in currency exchange rates as measured againstthe United States dollar. Because the change in value ofthe United States dollar measured against foreign currency may affect our consolidated financial results, changes in foreign currency exchange rates could positively or negatively affect our results as expressed inUnited States dollars. For example, whenthe United States dollar strengthens against foreign currencies in which our products are sold or weakens against foreign currencies in which we may incur costs, our consolidated net sales or related costs and expenses could be adversely affected. We translate our revenues and expenses in foreign markets using an average rate. We believe inflation 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 financial instruments to manage our exposure to such risks. We assess the anticipated foreign currency working capital requirements of our foreign operations and maintain a portion of our cash and cash equivalents denominated in foreign currencies sufficient to satisfy most of these anticipated requirements. We caution that we cannot predict with any certainty our future exposure to such currency exchange rate fluctuations or the impact, if any, such fluctuations may have on our future business, product pricing, operating expenses, and on our consolidated financial position, results of operations, or cash flows. However, to combat such market risk, we closely monitor our exposure to currency fluctuations. The regions and countries in which we currently have exposure to foreign currency exchange rate risk include (i)North America /South America (Canada ,Colombia andMexico ); (ii) EMEA (Austria , theCzech Republic ,Denmark ,Estonia ,Finland ,Germany , theRepublic of Ireland ,the Netherlands ,Norway ,South Africa ,Spain ,Sweden ,Switzerland and theUnited Kingdom ); and (iii)Asia/Pacific (Australia ,Japan ,New Zealand , theRepublic of Korea ,Singapore ,Taiwan ,Hong Kong andChina ). The current (spot) rate, average currency exchange rates, and the low and high of such currency exchange rates as compared tothe United States dollar, for each of these countries as of and for the year endedDecember 31, 2022 were as follows: Year ended December 31, 2022 As of December 31, 2022 Country (foreign currency name) Low High Average Spot Australia (Australian Dollar) 0.62084 0.75967 0.69513 0.67923 Canada (Canadian Dollar) 0.72052 0.80212 0.76917 0.73837 China (Renminbi) 0.13690 0.15849 0.14896 0.14445 Colombia (Peso) 0.00020 0.00027 0.00024 0.00021 Czech Republic (Koruna) 0.03902 0.04713 0.04292 0.04421 Denmark (Kroner) 0.12936 0.15398 0.14169 0.14360 Hong Kong (Hong Kong Dollar) 0.12739 0.12871 0.12771 0.12822 Japan (Yen) 0.00667 0.00880 0.00766 0.00758 Mexico (Peso) 0.04685 0.05203 0.04976 0.05131 New Zealand (New Zealand Dollar) 0.55670 0.69733 0.63632 0.63393 Norway (Krone) 0.09197 0.11627 0.10453 0.10148 Republic of Korea (Won) 0.00069 0.00084 0.00078 0.00079 Singapore (Singapore Dollar) 0.69382 0.74547 0.72574 0.74547 South Africa (Rand) 0.05449 0.06904 0.06141 0.05892 Sweden (Krona) 0.08813 0.11198 0.09930 0.09583 Switzerland (Franc) 0.99076 1.09692 1.04842 1.08295 Taiwan (New Taiwan Dollar) 0.03096 0.03632 0.03365 0.03258 United Kingdom (British Pound) 1.06884 1.37226 1.23759 1.20616 Various countries (1) (Euro ) 0.96198 1.14574 1.05403 1.06772
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