NATURE'S SUNSHINE PRODUCTS, INC. The following Management's Discussion and Analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management's discussion and analysis included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and our other reports filed since the date of such Form 10-K.
OVERVIEW
We are a natural health and wellness company primarily engaged in the manufacture and sale of nutritional and personal care products. We are aUtah corporation with our principal place of business inLehi, Utah , and sell our products directly to customers and to a sales force of independent consultants who resell our products to consumers. Our independent consultants market and sell our products to customers and sponsor other independent consultants who also market our products to customers. Because a significant amount of revenue is generated through the sales of our independent consultants, our revenue can be impacted by the number and productivity of our independent consultants. We seek to motivate and provide incentives to our independent consultants by offering high quality products, product support, training seminars, and financial incentives, among other considerations.
COVID-19
In or aboutDecember 2019 , a novel strain of coronavirus, SARS-CoV-2 "COVID-19", began aggressively spreading throughout the world, including all the primary markets where we conduct business. As COVID-19 has spread throughout the world, it has impacted our markets differently. At various times during the course of the pandemic and throughout our markets, governments have issued orders and restrictions that have limited the ability of our consultants to meet with consumers, put downward pressure on our sales in many of our markets and added substantial uncertainties to our global supply chain. Different variants of COVID-19 continue to arise and spread in various places around the world. We continue to take actions to mitigate the effects COVID-19 may have on our business, such actions may ultimately be insufficient to avoid substantial impact on the consolidated financial statement or material health of the Company. At this time, the duration of any business disruption and related financial impact cannot be reasonably estimated.
OnFebruary 24, 2022 , Russian forces launched significant military action againstUkraine . There continues to be sustained conflict and disruption in the region, which is expected to endure for the foreseeable future. Our consultants in ourRussia and Other market, a market within ourEurope business segment that includesRussia ,Ukraine ,Belarus and other Common Independent States in the region, continue to operate their independent businesses, albeit at a reduced level than prior to the start of the conflict. For the nine months endedSeptember 30, 2022 , we have recorded a pretax charge of$2.3 million , primarily related to the impairment of inventory, as well as accruals for contractual obligations related to Russian operations. We expect that this will continue to impact our business for the foreseeable future. We will continue monitoring the social, political, regulatory and economic environment inUkraine andRussia , and will consider further actions as appropriate. Net sales related toRussia and Other for the three and nine months endedSeptember 30, 2022 , were$13.3 million and$38.9 million , respectively, compared to$14.6 million and$42.9 million for the same periods in 2021. Operating income related toRussia and Other for the three and nine months endedSeptember 30, 2022 , was$1.0 million and$3.2 million , respectively, prior to the charges noted above, compared to$1.4 million and$4.1 million for the same periods in 2021. As ofSeptember 30, 2022 ,Russia and Other had assets of$5.9 million , net of working capital reserves, which primarily consisted of inventories and accounts receivable. More broadly, there could be additional negative impacts to our net sales, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest ofEurope . 23 -------------------------------------------------------------------------------- Table of Contents Inflation In 2021, the inflation rate in theU.S. began to increase significantly. In 2022, the inflation rate increase accelerated and during the nine months endedSeptember 30, 2022 , was the highest in 40 years.Europe and other areas in which we do business are also experiencing higher levels of inflation. Our operations have been, and may continue to be, adversely impacted by inflation, primarily from higher costs of raw materials, labor, production, distribution and transportation costs. In the third quarter of 2022, we experienced a decrease in our consolidated net sales of 8.9 percent (or 2.3 percent in local currencies) compared to the same period in 2021.Asia net sales decreased approximately 1.1 percent (or increased 11.9 percent in local currencies) compared to the same period in 2021.Europe net sales decreased approximately 11.4 percent (or 6.0 percent in local currencies) compared to the same period in 2021.North America net sales decreased approximately 16.5 percent (or 16.3 percent in local currencies) compared to the same period in 2021.Latin America and Other net sales decreased approximately 14.5 percent (or 13.3 percent in local currencies) compared to the same period in 2021. The strengthening of theU.S. dollar versus the local currencies, primarily in our Asian and European markets, resulted in an approximate 6.6 percent, or$7.6 million , decrease of our net sales during the quarter. Cost of sales increased$0.2 million during the three months endedSeptember 30, 2022 , compared to the same period in 2021, and as a percentage of net sales were 28.4 percent and 25.6 percent for the three months endedSeptember 30, 2022 and 2021, respectively. The increase in cost of sales percentage is primarily due to changes in inventory valuation reserves, changes in market mix, heightened inflation, and increases in raw materials, production and transportation costs. For the nine months endedSeptember 30, 2022 , we had incremental valuation charges of$5.0 million related to inventory. Of that amount,$1.7 million related to the conflict betweenRussia andUkraine , and$3.3 million related to changes in forecasted demand and production issues, among other factors. In absolute terms, selling, general and administrative expenses decreased$2.7 million during the three months endedSeptember 30, 2022 , compared to the same period in 2021, and as a percentage of net sales were 35.2 percent and 34.4 percent for the three months endedSeptember 30, 2022 and 2021, respectively. The dollar decrease was primarily related to lower service fees that resulted from a decline inChina's net sales, lower expenses relating to declines inRussia and Other's net sales, and lower compensation, partially offset by increases in the expected level of convention and distributor events. As an international business, we have significant sales and costs denominated in currencies other than theU.S. Dollar. We expect foreign markets with functional currencies other than theU.S. Dollar will continue to represent a substantial portion of our overall sales and related operating expenses. Accordingly, changes in foreign currency exchange rates could materially affect sales and costs or the comparability of sales and costs from period to period as a result of translating foreign markets financial statements into our reporting currency. 24 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following table summarizes our unaudited consolidated operating results from continuing operations inU.S. dollars and as a percentage of net sales for the three months endedSeptember 30, 2022 and 2021 (dollar amounts in thousands): Three Months Ended Three Months Ended September 30, 2022 September 30, 2021 Change Total Percent of Total Percent of Total dollars net sales dollars net sales dollars Percentage Net sales$ 104,506 100.0 %$ 114,746 100.0 %$ (10,240) (8.9) % Cost of sales 29,632 28.4 29,419 25.6 213 0.7 Gross profit 74,874 71.6 85,327 74.4 (10,453) (12.3) Volume incentives 33,070 31.6 35,793 31.2 (2,723) (7.6) SG&A expenses 36,792 35.2 39,528 34.4 (2,736) (6.9) Operating income 5,012 4.8 10,006 8.7 (4,994) (49.9) Other loss, net (2,281) (2.2) (886) (0.8) (1,395) (157.4) Income before income taxes 2,731 2.6 9,120 7.9 (6,389) (70.1) Provision for income taxes 2,531 2.4 3,662 3.2 (1,131) (30.9) Net income$ 200 0.2 %$ 5,458 4.8 %$ (5,258) (96.3) % The following table summarizes our unaudited consolidated operating results from continuing operations inU.S. dollars and as a percentage of net sales for the nine months endedSeptember 30, 2022 and 2021 (dollar amounts in thousands): Nine Months Ended Nine Months Ended September 30, 2022 September 30, 2021 Change Total Percent of Total Percent of Total dollars net sales dollars net sales dollars Percentage Net sales$ 319,161 100.0 %$ 326,145 100.0 %$ (6,984) (2.1) % Cost of sales 93,563 29.3 84,861 26.0 8,702 10.3 Gross profit 225,598 70.7 241,284 74.0 (15,686) (6.5) Volume incentives 99,241 31.1 105,491 32.3 (6,250) (5.9) SG&A expenses 114,281 35.8 108,666 33.3 5,615 5.2 Operating income 12,076 3.8 27,127 8.3 (15,051) (55.5) Other loss, net (3,037) (1.0) (2,290) (0.7) (747) (32.6) Income before income taxes 9,039 2.8 24,837 7.6 (15,798) (63.6) Provision for income taxes 10,573 3.3 8,433 2.6 2,140 25.4 Net income (loss)$ (1,534) (0.5) %$ 16,404 5.0 %$ (17,938) (109.4) % Net Sales International operations have provided, and are expected to continue to provide, a significant portion of our total net sales. As a result, total net sales will continue to be affected by fluctuations in theU.S. dollar against foreign currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another inU.S. dollars, we present net sales excluding the impact of foreign exchange fluctuations. We compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not aU.S. GAAP financial measure and removes from net sales inU.S. dollars the impact of changes in exchange rates between theU.S. dollar and the functional currencies of our foreign subsidiaries, by translating the current period net sales intoU.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. We believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of our foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales inU.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance withU.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 3. Quantitative and Qualitative Disclosures about Market Risk. 25
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales excluding the impact of currency fluctuations for the three months endedSeptember 30, 2022 and 2021 (dollar amounts in thousands):
Percent
Three Months Three Months Change
Ended Ended Impact of Excluding
September 30, September 30, Percent Currency Impact of
2022 2021 Change Exchange Currency
Asia $ 47,878 $ 48,417 (1.1) % $ (6,307) 11.9 %
Europe 19,328 21,813 (11.4) (1,166) (6.0)
North America 31,504 37,738 (16.5) (89) (16.3)
Latin America and Other 5,796 6,778 (14.5) (81) (13.3)
$ 104,506 $ 114,746 (8.9) % $ (7,643) (2.3) %
The following table summarizes the changes in net sales by operating segment
with a reconciliation to net sales excluding the impact of currency fluctuations
for the nine months ended September 30, 2022 and 2021 (dollar amounts in
thousands):
Percent
Nine Months Nine Months Change
Ended Ended Impact of Excluding
September 30, September 30, Percent Currency Impact of
2022 2021 Change Exchange Currency
Asia $ 141,370 $ 127,708 10.7 % $ (12,515) 20.5 %
Europe 58,204 65,468 (11.1) (2,607) (7.1)
North America 101,567 112,872 (10.0) (192) (9.8)
Latin America and Other 18,020 20,097 (10.3) (168) (9.5)
$ 319,161 $ 326,145 (2.1) % $ (15,482) 2.6 %
Consolidated net sales for the three and nine months ended September 30, 2022 ,
were $104.5 million and $319.2 million , respectively, compared to $114.7 million
and $326.1 million for the same period in 2021, which represents decreases of
8.9 percent and 2.1 percent, respectively. The decrease was primarily related to
product sales declines in our Europe , North America , and Latin America and Other
operating segments. Excluding the impact of foreign currency exchange rate
fluctuations, consolidated net sales for the three and nine months ended
September 30, 2022 , decreased 2.3 percent and increased 2.6 percent,
respectively, from the same periods in 2021.
Net sales related toAsia for the three and nine months endedSeptember 30, 2022 , were$47.9 million and$141.4 million , respectively, compared to$48.4 million and$127.7 million for the same periods in 2021, or decrease of 1.1 percent and increase of 10.7 percent, respectively. In local currency, net sales for the three and nine months endedSeptember 30, 2022 , increased 11.9 percent and 20.5 percent, respectively, compared to the same periods in 2021. Notable activity in the following markets contributed to the results ofAsia : In ourSouth Korea market, net sales decreased$1.0 million and$5.3 million , or 6.4 percent and 10.9 percent, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. In local currency, net sales for the three and nine months endedSeptember 30, 2022 , increased 7.7 percent and decreased 0.3 percent, respectively, compared to the same periods in 2021. The increase in local currency for the three months endedSeptember 30, 2022 , was primarily the result of product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements. The decrease in local currency for the nine months endedSeptember 30, 2022 , was primarily the result of government restrictions in the market intended to slow the spread of COVID-19, which were not lifted until the second quarter. In ourTaiwan market, net sales increased$6.1 million and$20.3 million , or 82.9 percent and 136.5 percent, for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. In local currencies, net sales for the three 26 -------------------------------------------------------------------------------- Table of Contents and nine months endedSeptember 30, 2022 , increased 97.4 percent and 147.1 percent, compared to the same periods in 2021. We attribute the growth in net sales primarily to product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements. In ourJapan market, net sales decreased$0.2 million and increased$3.0 million , or decreased 1.8 percent and increased 11.1 percent, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. In local currencies, net sales for the three and nine months endedSeptember 30, 2022 , increased 22.0 percent and 30.3 percent, respectively, compared to the same periods in 2021. We attribute the growth in net sales primarily to product promotions intended to stimulate activity as well as an increase in demand for nutritional supplements. In ourChina market, net sales decreased$4.3 million and$1.2 million , or 34.5 percent and 3.8 percent, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. In local currencies, net sales for the three and nine months endedSeptember 30, 2022 , decreased 30.8 percent and 2.2 percent, respectively, compared to the same periods in 2021. The decrease in net sales was primarily the result of additional government restrictions in the market intended to slow the spread of COVID-19, which included lockdowns during the third quarter.
Net sales related toEurope for the three and nine months endedSeptember 30, 2022 , were$19.3 million and$58.2 million , respectively, compared to$21.8 million and$65.5 million for the same periods in 2021, or decreases of 11.4 percent and 11.1 percent, respectively. In local currency, net sales for the three and nine months endedSeptember 30, 2022 , decreased 6.0 percent and 7.1 percent, respectively, compared to the same periods in 2021. The functional currency for many of these markets is theU.S. Dollar which reduces the effect from foreign currency fluctuations. Fluctuations in foreign exchange rates had unfavorable impacts on net sales of$1.2 million and$2.6 million for the three and nine months endedSeptember 30, 2022 , respectively. Net sales decreased primarily as a result of conflict betweenRussia andUkraine which has placed significant financial pressures on the surrounding Western andEastern Europe markets, and customer sensitivity due to inflationary pressures, among other factors.North America Net sales related toNorth America for the three and nine months endedSeptember 30, 2022 , were$31.5 million and$101.6 million , respectively, compared to$37.7 million and$112.9 million for the same periods in 2021, or decreases of 16.5 percent and 10.0 percent, respectively. In local currency, net sales for the three and nine months endedSeptember 30, 2022 , decreased 16.3 percent and 9.8 percent, respectively, compared to the same periods in 2021. Inthe United States , net sales decreased$5.9 million and$10.5 million , or 16.8 percent and 10.0 percent, for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. The decrease in sales was due primarily to a reduction in the average order size attributed to customer sensitivity due to inflationary pressures, among other factors.
Net sales related toLatin America and Other markets for the three and nine months endedSeptember 30, 2022 , were$5.8 million and$18.0 million , respectively, compared to$6.8 million and$20.1 million for the same periods in 2021, or decreases of 14.5 percent and 10.3 percent, respectively. In local currency, net sales for the three and nine months endedSeptember 30, 2022 , decreased 13.3 percent and 9.5 percent, respectively, compared to the same periods in 2021. Fluctuations in foreign currency had unfavorable impacts on net sales of$0.1 million and$0.2 million for the three and nine months endedSeptember 30, 2022 , respectively. The decrease in sales was due primarily to a reduction in the average order size attributed to customer sensitivity due to inflationary pressures, among other factors.
Further information related to our
27
--------------------------------------------------------------------------------
Table of Contents
Cost of Sales
Cost of sales as a percent of net sales was 28.4 percent and 29.3 percent for
the three and nine months ended September 30, 2022 , compared to 25.6 percent and
26.0 percent for the same periods in 2021. The increase in cost of sales
percentage is primarily due to changes in inventory valuation reserves as a
result of the conflict between Russia and Ukraine , as well as reserves for other
markets, changes in market mix, persistent inflation, unfavorable exchange
rates, and increases in raw materials, production and transportation costs. For
the nine months ended September 30, 2022 , we had incremental valuation charges
of $5.0 million related to inventory. Of that amount, $1.7 million related to
the conflict between Russia and Ukraine , and $3.3 million related to changes in
forecast demand and production issues, among other factors.
Volume Incentives
Volume incentives expense as a percent of net sales was 31.6 percent and 31.1 percent for the three and nine months endedSeptember 30, 2022 , respectively, compared to 31.2 percent and 32.3 percent for the same periods in 2021. These payments are designed to provide incentives for reaching certain sales levels. Volume incentives vary slightly, on a percentage basis, by product due to pricing policies and commission plans in place in our various operations. We do not pay volume incentives inChina , instead we pay independent service fees which are included in selling, general and administrative expenses. Volume incentives as a percentage of net sales can fluctuate based on promotional activity and mix of sales by market. The increase in volume incentives as a percent of net sales for the three months endedSeptember 30, 2022 is primarily due to change in market mix, reflecting growth in markets where volume incentives as a percentage of net sales are higher than the consolidated average, and the decline inChina . The decrease for the nine months endedSeptember 30, 2022 reflects cost savings from theSeptember 2020 launch of our new consultant sales and compensation plan inNorth America andLatin America and Other.
Selling, General and Administrative
Selling, general and administrative expenses represent operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, marketing, occupancy costs, communications costs, bank fees, depreciation and amortization, independent services fees paid inChina , and other miscellaneous operating expenses. Selling, general and administrative expenses decreased by$2.7 million and$5.6 million , respectively, to$36.8 million and$114.3 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to the same periods in 2021. Selling, general and administrative expenses were 35.2 percent and 35.8 percent of net sales for the three and nine months endedSeptember 30, 2022 , compared to 34.4 percent and 33.3 percent for the same periods in 2021. The dollar decrease was primarily related to lower service fees that resulted from a decline inChina's net sales, lower expenses relating to declines inRussia and Other's net sales, and lower compensation expense, partially offset by increases in consultant events, promotions and marketing.
Other Loss, Net
Other loss, net, for the three and nine months endedSeptember 30, 2022 , were losses of$2.3 million and$3.0 million , respectively, compared to$0.9 million and$2.3 million during the same periods in 2021, respectively. Other loss, net for the three and nine months endedSeptember 30, 2022 primarily consisted of foreign exchange losses as a result of net changes in foreign currencies primarily inAsia ,Europe andLatin America .
Income Taxes
For the three months endedSeptember 30, 2022 and 2021, our provision for income taxes, as a percentage of income before income taxes was 92.7 percent and 40.2 percent, respectively, compared with aU.S. federal statutory rate of 21.0 percent. For the nine months endedSeptember 30, 2022 and 2021, our provision for income taxes, as a percentage of income before income taxes was 117.0 percent and 34.0 percent, respectively, compared with aU.S. federal statutory rate of 21.0 percent. The difference between the effective tax rate and theU.S. federal statutory tax rate for the three and nine months endedSeptember 30, 2022 , was primarily attributed to recording a valuation allowance against deferred tax assets for which we do not expect to receive a benefit.
The difference between the effective tax rate and the
28--------------------------------------------------------------------------------
Table of Contents deductible executive compensation, and net unfavorable foreign tax related items, partially offset by favorable deductions for stock compensation.
The difference between the effective tax rate for the three and nine months
ended
Our
As of
Product Categories
Our line of over 700 products includes several different product classifications, such as immune, cardiovascular, digestive, personal care, weight management and other general health products. We purchase herbs and other raw materials in bulk and, after quality control testing, we formulate, encapsulate, tablet or concentrate them, label and package them for shipment. Most of our products are manufactured at our facility inSpanish Fork, Utah . Contract manufacturers produce some of our products in accordance with our specifications and standards. We have implemented quality control procedures to verify that our contract manufacturers have complied with our specifications and standards. See Note 7, Segment Information, for a summary of theU.S. dollar amounts from the sale of general health, immune, cardiovascular, digestive, personal care and weight management products for the three and nine months endedSeptember 30, 2022 and 2021, by business segment.
We market our products primarily through our network of independent consultants, who market our products to customers through direct selling techniques and sponsor other independent consultants who also market our products to customers. We seek to motivate and provide incentives to our independent consultants by offering high quality products and providing independent consultants with product support, training seminars, sales conventions, travel programs and financial incentives. Our products sold inthe United States are shipped directly from our manufacturing and warehouse facilities located inSpanish Fork, Utah , as well as from our regional warehouses located inGeorgia ,Ohio andTexas . Many of our international operations maintain warehouse facilities and inventory to supply their independent consultants. However, in foreign markets where we do not maintain warehouse facilities, we have contracted with third-parties to distribute our products and provide support services to our force of independent consultants. Inthe United States , we generally sell our products on a cash or credit card basis. From time to time, ourU.S. operations extend short-term credit associated with product promotions. For certain of our international operations, we use independent distribution centers and offer credit terms that are generally consistent with industry standards within each respective country. We pay sales commissions, or "volume incentives" to our independent consultants based upon their own product sales and the product sales of their sales organization. As an exception, inChina , we do not pay volume incentives; rather, we pay independent service fees, which are included in selling, general and administrative expenses. These volume incentives are recorded as an expense in the year earned. The amounts of volume incentives that we expensed during the quarters endedSeptember 30, 2022 and 2021, are set forth in the Condensed Consolidated Financial Statements in Item 1 of this report. In addition to the opportunity to receive volume incentives, independent consultants who attain certain levels of monthly product sales are eligible for additional incentive programs including automobile allowances, sales convention privileges and travel awards. 29 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our principal use of cash is to pay for operating expenses, including volume incentives, inventory and raw material purchases, capital assets and funding of international expansion. As ofSeptember 30, 2022 , working capital was$78.9 million , compared to$88.0 million as ofDecember 31, 2021 . AtSeptember 30, 2022 , we had$57.0 million in cash, of which$2.9 million was held in theU.S. and$54.1 million was held in foreign markets and may be subject to various withholding taxes and other restrictions related to repatriation before becoming available to be used along with the normal cash flows from operations to fund any unanticipated shortfalls in future cash flows.
Our net consolidated cash inflows (outflows) are as follows (in thousands):
Nine Months Ended September 30,
2022 2021
Operating activities $ (2,866) $ 20,281
Investing activities (4,730) (4,626)
Financing activities (15,305) (29,475)
Operating Activities
For the nine months ended September 30, 2022 , operating activities used cash of
$2.9 million , compared to providing cash of $20.3 million in the same period in
2021. Operating cash flows decreased primarily due to lower gross margins and
the timing of payments for accrued liabilities, accrued volume incentives and
service fees, accounts payable, deferred revenue, and receipts of accounts
receivable.
Investing Activities
For the nine months endedSeptember 30, 2022 , investing activities used$4.7 million , compared to$4.6 million for the same period in 2021, which consisted of capital expenditures related to the purchase of equipment, computer systems and software. Financing Activities
For the nine months ended
During the nine months endedSeptember 30, 2022 , we used cash to repurchase 834,000 shares of our common stock under the share repurchase program for$12.9 million . AtSeptember 30, 2022 , the remaining balance available for repurchases under the program was$24.6 million . We maintain a revolving credit agreement withBank of America, N.A (the "Credit Agreement"), as well as a credit agreement withBanc of America Leasing and Capital, LLC (the "Capital Credit Agreement"). AtSeptember 30, 2022 , there was no outstanding balance under the Credit Agreement. During the nine months endedSeptember 30, 2022 we made monthly payments of$0.1 million pursuant to the Capital Credit Agreement. As ofSeptember 30, 2022 , there was$1.5 million outstanding balance under the Capital Credit Agreement,$1.3 million of which was classified as current. Our debt obligations are discussed in greater detail in Note 4, "Revolving Credit Facility and Other Obligations," to our Condensed Consolidated Financial Statements in Item 1, Part 1 of this report.
We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including capital expenditures, on both a short- and long-term basis.
In addition, other things such as a prolonged economic downturn, a decrease in demand for our products, an unfavorable settlement of our unrecognized tax positions or non-income tax contingencies could adversely affect our long-term liquidity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance withU.S. GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and 30 -------------------------------------------------------------------------------- Table of Contents related disclosure of contingent assets and liabilities. On a regular basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations. We have discussed the development, selection and disclosure of these estimates with the Board of Directors and our Audit Committee. A summary of our significant accounting policies is provided in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of the Annual Report on Form 10-K for the year endedDecember 31, 2021 . We believe the critical accounting policies and estimates described below reflect our more significant estimates and assumptions used in the preparation of the consolidated financial statements. The impact and any associated risks on our business that are related to these policies are also discussed throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect reported and expected financial results.
Revenue Recognition
Our revenue recognition practices are discussed in Note 12, "Revenue Recognition," to our Condensed Consolidated Financial Statements in Item 1, Part 1 of this report.
Inventories Inventories are adjusted to lower of cost and net realizable value, using the first-in, first-out method. The components of inventory cost include raw materials, labor and overhead. To estimate any necessary adjustments, various assumptions are made in regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning and market conditions. If future demand and market conditions are less favorable than our assumptions, additional inventory adjustments could be required.
Incentive Trip Accrual
We accrue for expenses associated with our direct sales program, which rewards independent consultants with paid attendance for incentive trips, including our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could generate liabilities more or less than the amounts recorded. Contingencies We are involved in certain legal proceedings and disputes. When a loss is considered probable in connection with litigation or non-income tax contingencies and when such loss can be reasonably estimated with a range, we record our best estimate within the range related to the contingency. If there is no best estimate, we record the minimum of the range. As additional information becomes available, we assess the potential liability related to the contingency and revise the estimates. Revision in estimates of the potential liabilities could materially affect our results of operations in the period of adjustment. Our contingencies are discussed in further detail in Note 10, "Commitments and Contingencies", to the Notes of our Condensed Consolidated Financial Statements, of Item 1, Part 1 of this report.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities and contingent reserves reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes in boththe United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining our consolidated provision for income taxes. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that we are using to manage the underlying businesses. 31 -------------------------------------------------------------------------------- Table of Contents Valuation allowances are recorded as reserves against net deferred tax assets by us when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
© Edgar Online, source
