What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-17 compared with 2022-03-15 · 72 added, 137 removed, 360 unchanged (37% of the section changed)

12 unchanged sentences

and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China).

We also ship our products to customers in the following countries:

Belgium, France, Greece, Italy, Luxembourg, and Poland.

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 .

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Current Economic Conditions and Recent Developments

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.

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.

RESULTS OF OPERATIONS

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Total operating expenses 104,553 76.2 % 116,564 73.0 % (12,011) (10.3) %

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

(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 %

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

(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

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Gross profit $ 104.1 $ 112.4 $ 125.6 $ (13.2) (10.5) %

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

(Loss) income from operations $ (0.4) $ 1.9 $ 9.0 $ (7.1) (78.9) %

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

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Total $ 137.2 100.0 % $ 159.8 100.0 %

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

Overall net sales decreased by $22.6 million, or 14.1%, for 2022, as compared to 2021.

For the year ended December 31, 2022, our operations outside of the Americas accounted for approximately 69.7% of our consolidated net sales, whereas in the same period in 2021, our operations outside of the Americas accounted for approximately 70.7% of our consolidated net sales.

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 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.

Sales for the Americas 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 ended December 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 ended December 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 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, 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.

Product sales for the year ended December 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.

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Total $ 6.2 $ 8.0 $ (1.8) (22.5) %

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.

Total pack sales and associate fees for the year ended December 31, 2022 decreased by $1.8 million, or 22.5%, to $6.2 million, as compared to $8.0 million for the same period in 2021.

The number of packs sold and associate fees collected decreased by 3.3%.

During 2022 and continuing into 2023, we took the following actions in an effort to increase the number of independent associates and preferred customers:

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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, 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.

For the years ended December 31, 2022 and 2021, other sales remained constant at $0.8 million.

For the year ended December 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 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.

As sales declined, commission expenses decreased for the year ended December 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 ending December 31, 2022 and 38.5% for the same period in the prior year.

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.

Incentive costs increased for the year ended December 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 ended December 31, 2022, as compared to 1.4% for the same period in 2021.

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

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, 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.

For the year ended December 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 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, 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 ended December 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 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).

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.

Depreciation and Amortization Expense

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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.

Primarily due to foreign exchange losses, other expense was $0.2 million and $0.2 million for the years ending December 31, 2022 and 2021, respectively.

Provision for Income Taxes

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Mexico 30.0 % 30.0 %

Netherlands (4)

Norway 22.0 % 22.0 %

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23.2 % 23.2 %

(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.

(1) For 2021, the Company qualified for a reduced 5% tax rate in China as a Small Low Profit Enterprise, however in 2022, the Company no longer

qualified for the reduced rate and is now taxed at the full 25% rate due to increased earnings.

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

2022, the Company liquidated the entity.

(3) The Company paid taxes at 10% for Gibraltar earnings until August 1, 2021, and 12.5% from August 1, 2021 onward.

(4) On September 13, 2022, the Company established a legal entity in the Netherlands called Mannatech Netherlands BV.

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

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(7) 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%.

(8) Includes blended state effective rate of 2.2% for 2022 and 2021 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.

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For each of the years ended December 31, 2022 and 2021, the Company’s effective tax rate was (837.4)% and (10.7)%, 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.

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 in Korea, the Company recording a valuation allowance on U.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.

At December 31, 2022 and 2021, the Company’s valuation allowance was $9.8 million and $7.9 million, respectively.

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Country 2022 2021

Australia $ — $ 0.2

China $ 0.4 $ 0.5

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Cash and Cash Equivalents

As of December 31, 2021, our cash, cash equivalents and restricted cash decreased by 6.8%, or $1.9 million, to $25.6 million from $27.5 million as of December 31, 2020.

As of December 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 of December 31, 2021.

The Company is required to restrict cash for (i) direct selling insurance premiums and credit card sales in the Republic of Korea;

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The current portion of restricted cash at each of December 31, 2022 and 2021 was $0.9 million.

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.

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.

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Working capital represents total current assets less total current liabilities.

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.

At December 31, 2022, our working capital decreased by $7.6 million, or 59.8%, to $5.1 million

from $12.7 million at December 31, 2021.

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

Net Cash Flows

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Operating Activities

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, 2021, this increase was due to improved operating profits and working capital management.

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

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For the year ended December 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 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.

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 for the repurchase of common stocks.

For the year ended December 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 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, 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.

General Liquidity and Cash Flows

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We also have finance lease liabilities of $0.2 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.

We have a pension obligation of $0.3 million related to our employee benefit plan at our Japan subsidiary.

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 includes government restriction and changes in consumer demand for the Company’s products.

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.

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

We experienced challenges in getting materials and ingredients to our contract manufacturers and finished products to our distribution centers as a result of reductions in global transportation capacity.

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

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.

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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 and/or improve revenue as compared to operational expenses.

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.

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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 December 31, 2021 and 2020, our inventory reserves were $0.4 million and $0.5 million, respectively.

Long Lived Fixed Assets and Capitalization of Software Development Costs

In addition to capitalizing long-lived fixed asset costs, we also capitalize costs associated with internally developed software projects (collectively “fixed assets”) and amortize such costs over the estimated useful lives of such fixed assets.

Fixed assets are carried at cost less accumulated depreciation computed using the straight-line method over the assets’ estimated useful lives.

Leasehold improvements are amortized over the shorter of the remaining lease terms or the estimated useful lives of the improvements.

Expenditures for maintenance and repairs are charged to operations as incurred.

If a fixed asset is sold or otherwise retired or disposed of, the cost of the fixed asset and the related accumulated depreciation or amortization is written off and any resulting gain or loss is recorded in other operating costs in our consolidated statement of operations.

We review our fixed assets for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable, such as plans to dispose of an asset before the end of its previously estimated useful life.

Our impairment review includes a comparison of future projected cash flows generated by the asset, or group of assets, with its associated net carrying value.

If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carrying amount exceeds the fair value.

The fair value is determined by calculating the discounted expected future cash flows using an estimated risk-free rate of interest.

Any identified impairment losses are recorded in the period in which the impairment occurs.

The carrying value of the fixed asset is adjusted to the new carrying value and any subsequent increases in fair value of the fixed asset are not recorded.

In addition, if we determine the estimated remaining useful life of the asset should be reduced from our original estimate, the periodic depreciation expense is adjusted prospectively, based on the new remaining useful life of the fixed asset.

The impairment calculation requires us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives, and discount rates.

If actual results are not consistent with our estimates and assumptions, we may be exposed to an additional impairment charge, which could be material to our results of operations.

In addition, if accounting standards change, or if fixed assets become obsolete, we may be required to write off any unamortized costs of fixed assets;

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.

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.

Based on management’s analysis, no material impairments existed during the years ended December 31, 2021 and 2020.

At each of December 31, 2022 and 2021, our inventory reserves were $0.4 million .

Uncertain Income Tax Positions and Tax Valuation Allowances

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.

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.

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There are ongoing income tax audits in various international jurisdictions that we believe are not material to our financial statements.

As of December 31, 2022, there was nothing recorded in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions.

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.

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We recognize revenue from shipped packs and products upon receipt by the customer.

Corporate-sponsored event revenue is recognized when the event is held.

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.

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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 based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of the contracts.

Deferred Commissions

We defer commissions on (i) the sales of products shipped but not received by the customers by the end of the respective period and (ii) the loyalty program.

Deferred commissions are incremental costs and are amortized to expense consistent with how the related revenue is recognized.

Deferred commissions were $2.4 million and $2.3 million at December 31, 2021 and December 31, 2020, respectively.

Deferred Revenue

We defer certain components of revenue.

Deferred revenue consists of:

(i) sales of products shipped but not received by the customers by the end of the respective period;

(ii) revenue from the loyalty program;

(iii) prepaid registration fees from customers planning to attend a future corporate-sponsored event;

and (iv) prepaid annual associate fees.

At December 31, 2021 and December 31, 2020, deferred revenue was $4.9 million and $5.5 million, respectively.

Our customer loyalty program conveys a material right to the customer as it provides the promise to redeem loyalty points for the purchase of products, which is based on earning points through placing consecutive qualified automatic orders.

The timing and recognition of loyalty points has not changed with the adoption of ASC 606, Revenue from Contracts with Customers (“ASC Topic 606”).

The Company factors in breakage rates, which is the percentage of the loyalty points that are expected to be forfeited or expire, for purposes of revenue recognition.

Breakage rates are estimated based on historical data and can be reasonably and objectively determined.

There have not been significant changes for the breakage estimate as a result of adopting ASC Topic 606.

The deferred revenue associated with the loyalty program at December 31, 2021 and December 31, 2020 was $4.3 million and $4.5 million, respectively.

Loyalty program (in thousands)

Loyalty deferred revenue as of January 1, 2020 $ 3,127

Loyalty points forfeited or expired (3,249)

Loyalty points used (9,385)

Loyalty points vested 12,771

Loyalty points unvested 1,223

Loyalty deferred revenue as of December 31, 2020 $ 4,487

Loyalty deferred revenue as of January 1, 2021 $ 4,487

Loyalty points forfeited or expired (3,987)

Loyalty points used (9,809)

Loyalty points vested 11,676

Loyalty points unvested 1,925

Loyalty deferred revenue as of December 31, 2021 $ 4,292

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

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The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC Topic 606.

Historically, sales returns estimates have not materially deviated from actual sales returns, as the majority of our customers who return merchandise do so within the first 90 days after the original sale.

Sales returns have historically averaged 1.5% or less of our gross sales.

For the years ended December 31, 2021 and December 31, 2020, our sales return reserve was composed of the following (in thousands) :

Sales reserve as of January 1, 2020 $ 68

Provision related to sales made in current period 1,028

Adjustment related to sales made in prior periods 5

Actual returns or credits related to current period (959)

Actual returns or credits related to prior periods (71)

Sales reserve as of December 31, 2020 $ 71

Sales reserve as of January 1, 2021 $ 71

Provision related to sales made in current period 778

Adjustment related to sales made in prior periods (11)

Actual returns or credits related to current period (728)

Actual returns or credits related to prior periods (55)

Sales reserve as of December 31, 2021 $ 55

Accounting for Stock-Based Compensation

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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 “calculated fair value”).

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

2021 Grants June 2021 Grant

For the year ended December 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

Dividend yield 2.6 % 3.9 %

Risk-free rate of return 0.7 %

Common stock price volatility 56.7 %

Expected average life of stock options (in years) 4.5

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.

13 unchanged sentences

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.

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.

We resolved the Busan Customs Office audit of Korea customs values for a $0.4 million lower cost than we accrued last year.

As we process commissions monthly, Mannatech Korea receives from Mannatech Inc.

3 unchanged sentences

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