What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-15 compared with 2021-03-19 · 88 added, 163 removed, 409 unchanged (38% of the section changed)

27 unchanged sentences

Current Economic Conditions and Recent Developments

Overall net sales decreased $6.3 million, or 4.0%, for 2020, as compared to 2019.

Our 2020 net sales declined $4.2 million, or 2.7%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.1 million decrease in GAAP net sales as compared to 2019.

The net sales comparisons for the year ended December 31, 2020 and December 31, 2019 were primarily affected by foreign currency translation and the worldwide spread of COVID-19.

Excluding the effects due to the translation of foreign currencies into U.S.

dollars, net sales would have decreased $4.2 million for 2020.

These adjusted net sales expressed in Constant dollars are a non-GAAP financial measure discussed in further detail below.

Overall net sales increased $8.4 million, or 5.5%, for 2021, as compared to 2020.

Our 2021 net sales increased $4.7 million, or 3.1%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and favorable foreign exchange caused a $3.7 million increase in GAAP net sales as compared to 2020.

RESULTS OF OPERATIONS

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Total operating expenses 116,564 73.0 % 111,411 73.6 % 5,153 4.6 %

Income (loss) from operations 4,491 3.0 % 6,433 4.1 % (1,942) (30.2) %

Interest income (expense) 83 0.1 % (16) — % 99 (618.8) %

Other income (expense), net 1,151 0.8 % (681) (0.4) % 1,832 269.0 %

Income (loss) before income taxes 5,725 3.8 % 5,736 3.6 % (11) 0.2 %

Income from operations 9,049 5.7 % 4,491 3.0 % 4,558 101.5 %

Interest income 66 — % 83 0.1 % (17) (20.5) %

Other (expense) income, net (223) (0.1) % 1,151 0.8 % (1,374) 119.4 %

Income before income taxes 8,892 5.6 % 5,725 3.8 % 3,167 55.3 %

Income tax provision 950 0.6 % 536 0.4 % 414 77.2 %

Net income (loss) $ 6,261 4.1 % $ 3,289 2.1 % $ 2,972 (90.4) %

Net income $ 9,842 6.2 % $ 6,261 4.1 % $ 3,581 (57.2) %

Non-GAAP Financial Measures

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Gross profit $ 125.6 $ 122.8 $ 115.9 $ 6.9 6.0 %

Income (loss) from operations $ 4.5 $ 4.8 $ 6.4 $ (1.6) (25.0) %

Income from operations $ 9.0 $ 8.3 $ 4.5 $ 3.8 84.4 %

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

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Total $ 159.8 100.0 % $ 151.4 100.0 %

Overall net sales decreased by $6.3 million, or 4.0%, for 2020, as compared to 2019.

Overall net sales increased by $8.4 million, or 5.5%, for 2021, as compared to 2020.

For the year ended December 31, 2021, our operations outside of the Americas accounted for approximately 70.7% of our consolidated net sales, whereas in the same period in 2020, our operations outside of the Americas accounted for approximately 70.3% of our consolidated net sales.

Sales for the Americas decreased by $3.1 million, or 6.5%, to $44.9 million for 2020 as compared to $48.0 million for the same period in 2019.

This decrease was primarily due to a 16.5% decline in the number of active independent associates and preferred customers and a 9.7% decrease in revenue per active independent associate and preferred customer.

Foreign currency exchange had the effect of decreasing revenue by $0.3 million for the year ended December 31, 2020, as compared to the same period in 2019.

The currency impact is due to the weakening of the Mexican Peso.

During 2020, Asia/Pacific sales decreased by $3.9 million, or 4.1%, to $92.1 million as compared to $96.0 million for 2019.

This decrease was primarily due to a 1.8% decrease in the number of active independent associates and preferred customers and a 6.9% decrease in revenue per active independent associate and preferred customer.

During the year ended December 31, 2020, the loyalty program in Asia/Pacific decreased sales by $0.3 million, as compared to the same period in 2019.

Foreign currency exchange had the effect of decreasing revenue by $0.4 million for the year ended December 31, 2020, as compared to the same period in 2019.

The currency impact is primarily due to the weakening of the Korean Won, Australian Dollar, New Zealand Dollar and Singapore Dollar, which was partially offset by the strengthening of the Japanese Yen, Chinese Yuan, Hong Kong Dollar and Taiwanese Dollar.

Sales for the Americas increased by $1.9 million, or 4.2%, to $46.8 million for 2021 as compared to $44.9 million for the same period in 2020.

This increase was primarily due to a 9.9% increase in revenue per active independent associate and preferred customer and a 1.7% increase in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of increasing revenue by $0.2 million for the year ended December 31, 2021, as compared to the same period in 2020.

The currency impact is due to the strengthening of the Mexican Peso.

During 2021, Asia/Pacific sales increased by $5.6 million, or 6.1%, to $97.7 million as compared to $92.1 million for 2020.

This increase was primarily due to a 20.5% increase in revenue per active independent associate and preferred customer, which was partially offset by a 4.3% decrease in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of increasing revenue by $2.3 million for the year ended December 31, 2021, as compared to the same period in 2020.

The currency impact is primarily due to the strengthening of the Korean Won and Australian Dollar, which was partially offset by the weakening of the Japanese Yen.

During 2021, EMEA sales increased by $0.9 million, or 6.3%, to $15.3 million as compared to $14.4 million for 2020.

This increase was primarily due to an 8.5% increase in the number of active independent associates and preferred customers, which was partially offset by a 16.4% decrease in revenue per active independent associate.

Foreign currency exchange had the effect of decreasing revenue by $1.4 million for the year ended December 31, 2020 as compared to the same period in 2019.

The currency impact is primarily due to the weakening of the South African Rand and Norwegian Krone, which was partially offset by the strengthening of the British Pound, Euro, Swedish Krona and Danish Krone.

Our total sales and sales mix could be influenced by any of the following:

• the impact of the COVID-19 pandemic;

• changes in our sales prices;

• changes in consumer demand;

• changes in the number of independent associates and preferred customers;

• 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;

• fluctuations in foreign currency exchange rates.

This increase was primarily due to a 25.9% increase in revenue per active independent associate and preferred customer and a 9.0% increase in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of increasing revenue by $1.2 million for the year ended December 31, 2021 as compared to the same period in 2020.

The currency impact is primarily due to the strengthening of the South African Rand.

Our sales mix for the years ended December 31, was as follows (in millions, except percentages) :

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Our product sales are made to our independent associates and preferred customers at published wholesale prices.

Product sales for the year ended December 31, 2020 decreased by $8.4 million, or 5.4%, to $146.2 million, as compared to $154.6 million for the same period in 2019.

The decrease in product sales was primarily due to a decrease in the number of orders processed.

Product sales for the year ended December 31, 2021 increased by $4.8 million, or 3.3%, to $151.0 million, as compared to $146.2 million for the same period in 2020.

The increase in product sales was primarily due to an increase in the average order value.

The average order value in 2021 was $190, as compared to $183 for the same period in 2020.

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There are several pack options available to our associates.

In certain of these markets, pack sales are completed during the final stages of the registration process, entitling the Associates to earn commissions, benefits and incentives for that year.

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.

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Total $ 8.0 $ 4.2 $ 3.8 90.5 %

Total pack sales and associate fees for the year ended December 31, 2020 increased by $1.9 million, or 82.6%, to $4.2 million, as compared to $2.3 million for the same period in 2019 as the number of packs sold and associate fees collected increased by 4.3%.

Total pack sales and associate fees for the year ended December 31, 2021 increased by $3.8 million, or 90.5%, to $8.0 million, as compared to $4.2 million for the same period in 2020.

The number of packs sold and associate fees collected increased by 4.2%.

Also, the average pack value for the year ended December 31, 2021 was $84, as compared to $45 for the same period in 2020.

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Promotional materials, training, database applications and business management tools to support our independent associates, which in turn helps stimulate product sales.

For the year ended December 31, 2020, other sales increased by $0.2 million, or 25.0%, to $1.0 million, as compared to $0.8 million for the same period in 2019.

The increase was primarily due to the increase in active new and continuing active associates and preferred customers.

For the year ended December 31, 2020, gross profit decreased by $10.3 million, or 8.1%, to $115.9 million, as compared to $126.2 million for the same period in 2019.

Gross profit as a percentage of net sales decreased to 76.5% for 2020, as compared to 80.0% for 2019.

To motivate our associates to stay engaged in the business amidst the COVID-19 government lockdowns, management introduced value pricing and new products in key markets.

As global supply chains were impacted by the pandemic, our logistics costs rose.

Also, foreign exchange rates primarily related to the declining value of the South African Rand impacted our gross margins.

For the year ended December 31, 2021, other sales decreased by $0.2 million, or 20.0%, to $0.8 million, as compared to $1.0 million for the same period in 2020.

The decrease was primarily due to the decrease in active new and continuing active associates and preferred customers.

For the year ended December 31, 2021, gross profit increased by $9.7 million, or 8.4%, to $125.6 million, as compared to $115.9 million for the same period in 2020.

Gross profit as a percentage of net sales increased to 78.6% for 2021, as compared to 76.5% for 2020 due to the benefits from foreign exchange (mostly Korea Won and South Africa Rand), price increases in a few markets and improvements in our supply chain.

Commission and Incentives

Commission expenses decreased for the year ended December 31, 2020, by 4.9%, or $3 million to $58.7 million, as compared to $61.7 million for the same period in 2019.

As sales grew, commission expenses increased for the year ended December 31, 2021, by 4.9%, or $2.9 million to $61.6 million, as compared to $58.7 million for the same period in 2020.

Commissions as a percentage of net sales were 38.5% for the year ending December 31, 2021 and 38.8% for the same period in the prior year.

Reversals of expired commission payment vouchers provided a reduction to our commission expenses of $0.6 million and $1.4 million, in 2020 and 2019, respectively.

Incentive costs increased for the year ended December 31, 2020 by 3.8%, or $0.1 million, to $2.7 million as compared to $2.6 million for the same period in 2019.

The costs of incentives, as a percentage of net sales increased to 1.8% for the year ended December 31, 2020, as compared to 1.6% for the same period in 2019.

This increase was related to incentives in the Americas and Asia/Pacific.

Incentive costs decreased for the year ended December 31, 2021 by 18.5%, or $0.5 million, to $2.2 million as compared to $2.7 million for the same period in 2020.

The costs of incentives, as a percentage of net sales decreased to 1.4% for the year ended December 31, 2021, as compared to 1.8% for the same period in 2020.

This decrease was related to travel incentives in the Americas and Asia/Pacific as governments required quarantine periods before entering the country, which reduced travel.

Selling and Administrative Expenses

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These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses.

For the year ended December 31, 2020, overall selling and administrative expenses decreased by $3.0 million, or 9.7%, to $27.8 million, as compared to $30.8 million for the same period in 2019.

The decrease in selling and administrative expenses consisted of a $2.5 million decrease in payroll costs, a $0.3 million decrease in stock-based compensation and a $0.2 million decrease in contract labor costs.

For the year ended December 31, 2021, overall selling and administrative expenses increased by $1.6 million, or 5.7%, to $29.4 million, as compared to $27.8 million for the same period in 2020.

The increase in selling and administrative expenses consisted of a $1.9 million increase in payroll costs and a $0.1 million increase in distribution costs, which was partially offset by a $0.3 million decrease in contract labor costs and a $0.1 million decrease in stock-based compensation.

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 ended December 31, 2020, other operating costs decreased by $2.4 million, or 10.4%, to $20.2 million, as compared to $22.6 million for the same period in 2019.

For the year ended December 31, 2021, other operating costs increased by $1.4 million, or 7%, to $21.6 million, as compared to $20.2 million for the same period in 2020.

For the year ended December 31, 2021, other operating costs, as a percentage of net sales, were 13.5%, as compared to 13.4% for the same period in 2020.

The decrease was due to a $1.2 million decrease in travel and entertainment costs, a $0.6 million decrease in office expenses, a $0.3 million decrease in legal and consulting fees, and a $0.3 million decrease in credit card fees, sales tax adjustments and other operating costs.

The increase was due to a $0.8 million increase in consulting fees, and the $0.6 million charge to earnings for our expected outcome from the Korea Customs Audit (see Note 11).

Depreciation and Amortization Expense

For the years ended December 31, 2021 and 2020, depreciation and amortization expense was $1.7 million and $2.0 million, respectively.

Other Income (Expense), net

Primarily due to foreign exchange gains, other income (expense) was $1.2 million and $(0.7) million for the years ending December 31, 2020 and 2019, respectively.

Other (Expense) Income, net

Primarily due to foreign exchange gains, other (expense) income was $(0.2) million and $1.2 million for the years ending December 31, 2021 and 2020, respectively.

Provision for Income Taxes

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Canada 26.5 % 26.5 %

Colombia 32.0 % 33.0 %

31.0 % 32.0 %

Cyprus 12.5 % 12.5 %

1 unchanged sentence

Gibraltar (3)

11.3 % 10.0 %

Hong Kong 16.5 % 16.5 %

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United States (7)

(1) For 2020, the Company qualified for a reduced 5% tax rate in China as a Small Low Profit Enterprise.

23.2 % 23.8 %

(1) For 2020 and 2021, the Company qualifies for a reduced 5% tax rate in China as a Small Low Profit Enterprise.

(2) On November 1, 2019, the Company suspended operations in Colombia, but maintains the legal entity, Mannatech Colombia SAS.

(3) For 2021, the Company will pay taxes at 10% Gibraltar earnings until August 1, 2021, and 12.5% from August 1, 2021 onward.

(4) On August 1, 2016, the Company established a legal entity in Russia called Mannatech RUS Ltd., but currently does not operate in Russia.

(3) On July 1, 2019, the Company suspended active operations in Switzerland, but maintains the legal entity.

(5) On July 1, 2019, the Company suspended operations in Switzerland, but maintains the legal entity.

(6) On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity, Mannatech Ukraine LLC.

(7) Includes blended state effective rate of 2.2% for 2021 and 2.8% for 2020 in addition to the U.S federal statutory rate of 21%.

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.

For the years ended December 31, 2020 and 2019, the Company’s effective tax rate was (9.4)% and 42.5%, respectively.

In 2020, the Company had a significant decrease in its rate due to the carryback of U.S.

net operating losses as allowed by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020.

In 2019, the Company had a higher effective rate due to its mix of earnings across jurisdictions and valuation allowance recorded on certain losses.

For each of the years ended December 31, 2021 and 2020, the Company’s effective tax rate was (10.7)% and (9.4)%, respectively.

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 foreign tax credits.

In 2020, the Company had a significant decrease in its rate due to the carryback of U.S net operating losses as allowed by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), enacted on March 27, 2020.

At December 31, 2021 and 2020, the Company’s valuation allowance was $7.9 million and $11.9 million, respectively.

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Colombia 0.5 0.6

Cyprus 0.2 0.2

Mexico 1.9 3.1

3 unchanged sentences

Taiwan 0.6 1.1

Ukraine — 0.1

United Kingdom — 0.1

United States 3.4 5.5

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• government regulations;

• global pandemic;

• the outcome of certain lawsuits;

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The current portion of restricted cash at each of December 31, 2021 and 2020 was $0.9 million.

Fluctuations in currency rates produced an increase of $1.3 million in cash and cash equivalents in 2020 as compared to a decrease of $0.6 million in 2019.

Fluctuations in currency rates produced a decrease of $2.7 million in cash and cash equivalents in 2021 as compared to an increase of $1.3 million in 2020.

Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends.

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Working capital represents total current assets less total current liabilities.

At December 31, 2020, our working capital decreased by $1.6 million, or 13.2%, to $10.5 million from $12.1 million at December 31, 2019.

The decrease in working capital is primarily due to increases in accounts payable.

At December 31, 2021, our working capital increased by $2.2 million, or 21.0%, to $12.7 million from $10.5 million at December 31, 2020.

The increase in working capital is primarily due to a decrease in our current liabilities.

Net Cash Flows

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Cash provided by operating activities increased by $4.8 million for the year ended December 31, 2021, as compared to the same period in 2020.

For the year ended December 31, 2020, sources of cash include our profits, working capital management, and a $1.2 million tax refund as we amended returns as allowed by the CARES Act.

For the year ended December 31, 2021, this increase was due to improved operating profits and working capital management.

Investing Activities

For the year ended December 31, 2020, our investing activities used cash of $0.9 million, as compared to cash used of $1.2 million for the same period of 2019.

During the year ended December 31, 2020, we invested $0.9 million in computer hardware and software.

During the year ended December 31, 2019, we invested $0.8 million in computer hardware and software, $0.4 million in leasehold improvements in various international offices and training centers.

During the year ended December 31, 2021 and 2020, we invested $0.7 million and $0.9 million in computer hardware and software, respectively.

Financing Activities

For the year ended December 31, 2021, our financing activities used cash of $9.3 million compared to cash used of $9.9 million for the same period of 2020.

For the year ended December 31, 2020, we used approximately $0.6 million in the repayment of finance lease obligations and other long term liabilities, $3.4 million in the payment of dividends to shareholders, and $5.9 million in the repurchase of common stock.

For the year ended December 31, 2019, we used cash of approximately $1.2 million to repay finance lease obligations, $1.2 million for payment of dividends to shareholders, and $0.3 million for the repurchase of common stock, which was partially offset by cash provided by the exercise of stock options.

For the year ended December 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, $5.1 million in the repurchase of common stock, which was partially offset by $0.5 million cash provided by the exercise of stock options.

General Liquidity and Cash Flows

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Adverse outcomes on these uncertainties may lead to substantial liability or enforcement actions that could adversely affect our cash position.

Additionally, COVID-19 could adversely impact our workforce, supply chain or demand for our products and therefore, our liquidity in the next twelve months, however, such impact is currently unknown.

For more information see Note 1 Organization and Summary of Significant Accounting Policies, Note 7 Income Taxes, and Note 12 Litigation to our Consolidated Financial Statements.

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic, which has spread throughout our international regions and the United States.

We took 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.

On April 10, 2020, the Company received loan proceeds of $2,243,687 (the “Loan”) under the Paycheck Protection Program (“PPP”).

The PPP was established under the CARES Act and was administered by the SBA.

The Loan to the Company was made through JPMorgan Chase Bank, N.

A., the Company’s existing banker (the “Lender”).

At the time the Company applied for and received the Loan, the Company planned to use the Loan proceeds for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act.

After the Company received the proceeds of the Loan, the SBA provided subsequent guidance interpreting the PPP.

Based on such subsequent guidance, the Company made the determination to repay the Loan in full, which it did on April 30, 2020.

The Canada Revenue Agency is auditing the Company's GST filings from January 2019 through April 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 at December 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.

At December 31, 2021, we have one supply agreement that requires the Company to purchase an aggregate of $4.8 million through 2022, 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.

At December 31, 2021, our operating lease liabilities were $5.8 million, of which $1.5 million was recorded in Accrued expenses and $4.3 million was recorded in Other long-term liabilities.

We also have finance lease liabilities of $0.1 million and lease restoration liabilities of $0.3 million.

We have pension obligation of $0.9 million related to our employee benefit plan at our Japan subsidiary.

Responding 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 could impact their ability to engage with potential and existing customers.

The adverse economic effects of COVID-19 may also materially decrease demand for the Company’s products based on changes in consumer behavior or the restrictions in place by governments trying to curb the outbreak.

For example, the Company has rescheduled corporate sponsored events, and in some cases, our associates have canceled sales meetings.

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 includes 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.

For some products, the Company experienced shortages of raw materials and ingredients.

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Despite the impact on the global supply chain, the Company has overcome obstacles in shipping to our customers.

While the conditions described above are expected to be temporary, prolonged workforce disruptions, continued disruption in our supply chain and potential decreases in consumer demands negatively impacted our sales in fiscal year 2020 and may continue to negatively impact sales in fiscal year 2021 as well as the Company’s overall liquidity.

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

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We continuously monitor our compliance with the Nasdaq continued listing rules.

CONTRACTUAL OBLIGATIONS

The following summarizes our future commitments and obligations associated with various agreements and contracts as of December 31, 2020, for the years ending December 31 (in thousands) :

2021 2022 2023 2024 2025 Thereafter Total

Finance lease obligations $ 98 $ 75 $ 45 $ 21 $ 1 $ — $ 240

Purchase obligations (1)(2)(3)

5,175 2,617 — — — — 7,792

Operating leases obligations (4)

2,644 1,930 1,217 1,308 892 1,528 9,519

Note payable and other financing arrangements 449 — — — — — 449

Employment agreements 440 — — — — — 440

Royalty agreement 7 — — — — — 7

Tax liability (5)

— — — — — 202 202

Other obligations (6)

233 191 25 126 36 657 1,268

Total commitments and obligations $ 9,046 $ 4,813 $ 1,287 $ 1,455 $ 929 $ 2,387 $ 19,917

(1) For purposes of the table, a purchase obligation is defined as an agreement to purchase goods or services that is non-cancelable, enforceable and legally binding on the Company that specifies all significant terms, including:

fixed or minimum quantities to be purchased;

fixed, minimum or variable price provisions;

and the approximate timing of the transaction.

(2) Excludes approximately $18.0 million of finished product purchase orders that may be canceled or with delivery dates that have changed as of December 31, 2020.

(3) A raw materials supplier agreement changed from a 2 year auto-renew to 1 year and extended until November 2021.

(4) Represents the minimum future payments, including imputed interest, for operating leases within the scope of Accounting Standards Codification Topic 842, Leases .

Of the total present value of lease liabilities, $2.1 million was recorded in "Accrued expenses" and $6.1 million was recorded in "Other long-term liabilities".

See Note 5 to our Consolidated Financial Statements, Leases .

(5) Represents the tax liability associated with uncertain tax positions, see Note 7 to our Consolidated Financial Statements, Income Taxes .

(6) Other obligations are composed of pension obligations related to the Company's international operations (approximately $1 million) and lease restoration obligations (approximately $0.3 million).

We have maintained purchase commitments with certain raw material suppliers to purchase minimum quantities and to ensure exclusivity of our raw materials and the proprietary nature of our products.

Currently, we have one supply agreement that requires minimum purchase commitments.

We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and help ensure quality control standards.

These agreements do not require us to purchase any set minimums.

We have no present commitments or agreements with respect to acquisitions or purchases of any manufacturing facilities;

OFF-BALANCE SHEET ARRANGEMENTS

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Please see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about our Market Risks.

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES

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 affect the reported values of assets and liabilities at the date of our financial statements, the reported amounts of revenues and expenses during the reporting period, and the related disclosures of contingent assets and liabilities.

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.

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or if estimated useful lives change, we would be required to accelerate depreciation or amortization periods and recognize additional depreciation expense in our consolidated statement of operations.

Historically, our estimates and assumptions related to the carrying value and the estimated useful lives of our fixed assets have not materially deviated from actual results.

As of December 31, 2020, the estimated useful lives and net carrying values of fixed assets are as follows:

Estimated useful life Net carrying value at December 31, 2020

Office furniture and equipment 5 to 7 years $0.8 million

Computer hardware and software 3 to 5 years 2.0 million

Automobiles 3 to 5 years 0.1 million

Leasehold improvements 2 to 10 years 1.6 million

Total net carrying value at December 31, 2020 $4.5 million

The net carrying costs of fixed assets and construction in progress are exposed to impairment losses if our assumptions and estimates of their carrying values change, there is a change in estimated future cash flow, or there is a change in the estimated useful life of the fixed asset.

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Uncertain Income Tax Positions and Tax Valuation Allowances

As of December 31, 2020, we recorded $0.2 million in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions.

As of December 31, 2021, there was nothing recorded in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions.

As required by ASC Topic 740, Income Taxes (“ASC Topic 740”), we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions.

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In addition, as of December 31, 2021, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling $2.8 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.

In February 2018, the FASB issued Accounting Standards Update ("ASU") No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) ("ASU 2018-02").

The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Act from accumulated other comprehensive income into retained earnings.

ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.

The adoption of this standard had no impact on our consolidated financial statements.

Transfer Pricing

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Revenue Recognition

Our revenue is derived from sales of individual products, sales of starter and renewal packs, associate fees and shipping fees.

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.

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For the year ended December 31, 2021, our assumptions and estimates used for the calculated fair value of stock options granted in 2021 were as follows:

2020 Grants June

2021 Grants June 2021 Grant

Estimated fair value per share of options granted:

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If actual results differ, if circumstances change, or if we experience an unanticipated adverse outcome of any legal action, including any claim or assessment, we would be required to recognize the estimated amount that could reduce net income, earnings per share, and cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments ( “ASU 2016-13”) .

This standard adds to U.S.

GAAP an impairment model (known as the current expected credit loss (“CECL model”) that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses.

Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument.

Measurement of expected credit losses are to be based on relevant forecasts that affect collectability.

The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures.

Different components of the guidance require modified retrospective or prospective adoption.

ASU 2019-10 deferred the effective date of ASU 2016-13 for smaller reporting companies.

This standard will be effective for us as of January 1, 2023.

While our review is ongoing, we believe ASU 2016-13 will only have applicability to our receivables from revenue transactions.

Under ASC Topic 606, revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer.

At the point that trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts.

The Company is currently evaluating whether the new guidance will have an impact on our consolidated financial statements or existing internal controls.

See Note 1 to our Consolidated Financial Statements for further information on recent accounting pronouncements.

In November 2021, the Busan Custom Office began an audit of the Korean customs values and while the audit continues, we have booked a $0.6 million charge to Other Operating Expenses for the most probable outcome.

As we process commissions monthly Mannatech Korea receives from Mannatech 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 the Ministry 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 the Bank of Korea or a designated foreign exchange bank under compliance with the Foreign Exchange Transactions Act ("FETA") of Korea.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis