Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the two years ended December 31, 2023 and 2022. This discussion should be read in conjunction with “Item 15.1 – Consolidated Financial Statements” beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis. Refer to the Non-GAAP Financial Measure section herein for a description of how Constant dollar (“Constant dollar”) growth rate (a Non-GAAP financial metric) is determined.
COMPANY OVERVIEW
Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high quality, proprietary nutritional supplements, skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); 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 active associates and preferred customers . New pack sales and the receipt of new associate fees in connection with new positions in our network are leading indicators for the long-term success of our business. New associate or preferred customer positions are created in our network when our associate fees are paid or products and packs are purchased for the first time under a new account. We review and analyze net sales by geographical location and by products and packs on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.
Because we sell our products principally through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of active associates and preferred customers that occupy sales or purchasing positions in our network; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure. Our subsidiary in China, Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China.
Current Economic Conditions and Recent Developments
Consolidated net sales for the year ended December 31, 2023 was $132.0 million, as compared to $137.2 million for the year ended December 31, 2022 . Net sales decreased $5.2 million, or 3.8%, for 2023, as compared to 2022 . Our 2023 net sales declined $2.9 million, or 2.1%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.3 million decrease in GAAP net sales as compared to 2022.
We incurred an operating loss of $1.0 million for the year ended December 31, 2023, as compared to $0.4 million for the same period last year. Our 2023 operating loss, on a Constant dollar basis (see Non-GAAP Financial Measures, below), was $0.4 million.
In June 2023, the Company launched a tiered affiliate program in the United States under the brand name, “Trulu™.” The Trulu brand is operated by our wholly owned subsidiary, “NEMO”, and is separate from our network marketing business. For the year ended December 31, 2023 , we incurred an operating loss of $1.1 million in connection with the start-up of our NEMO business.
Excluding the startup loss of NEMO from the consolidated operating loss on a Constant dollar basis, we would have generated an operating profit of approximately $0.7 million in 2023, as compared to an operating loss of $0.4 million in 2022 .
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RESULTS OF OPERATIONS
Year Ended December 31, 2023 compared to Year Ended December 31, 2022
The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2023 and 2022 (in thousands, except percentages) .
2023 2022 Change
Total
Dollars % of
net sales Total
Dollars % of
net sales Dollar Percentage
Net sales $ 131,955 100.0 % $ 137,208 100.0 % $ (5,253) (3.8) %
Cost of sales 29,090 22.0 % 33,060 24.1 % (3,970) (12.0) %
Gross profit 102,865 78.0 % 104,148 75.9 % (1,283) (1.2) %
Operating expenses:
Commissions and incentives 53,588 40.6 % 55,483 40.4 % (1,895) (3.4) %
Selling and administrative expenses 48,613 36.8 % 47,443 34.6 % 1,170 2.5 %
Depreciation and amortization 1,628 1.2 % 1,627 1.2 % 1 0.1 %
Total operating expenses 103,829 78.7 % 104,553 76.2 % (724) (0.7) %
Loss from operations (964) (0.7) % (405) (0.3) % (559) 138.0 %
Interest income 4 — % 88 0.1 % (84) (95.5) %
Other expense, net (170) (0.2) % (162) (0.1) % (8) 4.9 %
Loss before income taxes (1,130) (0.9) % (479) (0.3) % (651) 135.9 %
Income tax provision (1,109) (0.8) % (4,011) (2.9) % 2,902 (72.4) %
Net loss $ (2,239) (1.7) % $ (4,490) (3.3) % $ 2,251 50.1 %
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), the table below summarizes operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: Net Sales, Gross Profit, and Loss from Operations. We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends and our operating results. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars in the current year, we calculate current year results at a constant exchange rate utilizing the prior year’s rate. Currency impact is determined as the difference between the actual GAAP results and the recalculated results for the current year at the constant dollar rates (in millions, except percentages).
2023 2022 Constant Dollar Change
GAAP
Measure:
Total $ Translation Adjustment Non-GAAP Measure:
Constant $ GAAP
Measure:
Total $ Dollar Percent
Net sales $ 132.0 $ 2.3 $ 134.3 $ 137.2 $ (2.9) (2.1) %
Gross profit $ 102.9 $ 1.7 $ 104.6 $ 104.1 $ 0.5 0.5 %
Loss from operations $ (1.0) $ 0.6 $ (0.4) $ (0.4) $ — — %
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Net Sales in Dollars and as a Percentage of Consolidated Net Sales
Consolidated net sales by region for the years ended December 31, 2023 and 2022 were as follows (in millions, except percentages) :
2023 2022
Americas $ 42.8 32.4 % $ 41.6 30.3 %
Asia/Pacific 79.4 60.2 % 83.8 61.1 %
EMEA 9.8 7.4 % 11.8 8.6 %
Total $ 132.0 100.0 % $ 137.2 100.0 %
Consolidated domestic and foreign net sales for the years ended December 31, 2023 and 2022 were as follows (in millions, except percentages) :
2023 2022
Domestic $ 30.2 22.9 % $ 29.8 21.7 %
Foreign 101.8 77.1 % 107.4 78.3 %
Total $ 132.0 100.0 % $ 137.2 100.0 %
Net sales decreased by $5.2 million, or 3.8%, for 2023, as compared to 2022. For the year ended December 31, 2023, our operations outside of the Americas accounted for 67.6% of our consolidated net sales, as compared to 69.7% in 2022.
Sales for the Americas increased by $1.2 million, or 2.9%, to $42.8 million for 2023 as compared to $41.6 million for the same period in 2022. This increase was primarily due to a 4.4% increase in revenue per active independent associate and preferred customer, which was partially offset by a 1.4% decline in the number of active independent associates and preferred customers. Sales in the Americas includes the Mexico region. As a result of the strengthening of the Mexican Peso in 2023, foreign currency exchange had the effect of increasing revenue by $0.5 million for the year ended December 31, 2023, as compared to the same period in 2022.
During 2023, Asia/Pacific sales decreased by $4.4 million, or 5.3%, to $79.4 million as compared to $83.8 million for 2022. Foreign currency exchange had the effect of decreasing revenue in 2023 by $1.9 million, as compared to the same period in 2022. The currency impact is primarily due to the weakening of the Korean Won, Japanese Yen and Australian Dollar. In addition, net sales in the Asia/Pacific region was negatively impacted by a 12.2% decrease in revenue per active independent associate and preferred customer, which was partially due to the foreign exchange rate. Offsetting these declines, the number of active independent associates and preferred customers in the Asia/Pacific region increased 7.9% in 2023 as compared to 2022 .
For the year ended December 31, 2023, EMEA sales decreased by $2.0 million, or 16.9%, to $9.8 million as compared to $11.8 million for 2022. This decrease was primarily due to a 14.5% decrease in the number of active independent associates and preferred customers, and a 2.9% decrease in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of decreasing revenue by $0.9 million for the year ended December 31, 2023, as compared to the same period in 2022. The currency impact is primarily due to the weakening of the South African Rand.
Our sales mix for the years ended December 31, was as follows (in millions, except percentages):
2023 2022 Constant Dollar Change
GAAP
Measure:
Total $ Translation Adjustment Non-GAAP Measure:
Constant $ GAAP
Measure:
Total $ Dollar Percent
Product sales $ 125.3 $ 2.2 127.5 $ 130.2 $ (2.7) (2.1) %
Pack sales and associate fees 5.6 0.1 5.7 6.2 (0.5) (8.1) %
Other 1.1 — 1.1 0.8 0.3 37.5 %
Total $ 132.0 $ 2.3 $ 134.3 $ 137.2 $ (2.9) (2.1) %
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Our product sales consist primarily of sales made to our independent associates and preferred customers at published wholesale prices. Product sales for the year ended December 31, 2023 decreased by $4.9 million, or 3.8%, to $125.3 million, as compared to $130.2 million for the same period in 2022. On a constant dollar basis, product sales in 2023 decreased $2.7 million, or 2.1%, as compared to 2022. The decrease in product sales in 2023 reflects a 7.2% decrease in the number of orders processed, partially offset by an increase in the average order value of $180, as compared to $175 for the same period in 2022.
We attribute the lower number of orders processed in 2023 to the loss of continuing independent associates and preferred customers as compared to the recruitment of new independent associates and preferred customers. As a group, continuing independent associates and preferred customers place more orders than new recruits. Therefore, the decline in continuing independent associates and preferred customers had a larger impact on the number of orders we received in 2023.
The approximate number of active new and continuing active associates and preferred customers who purchased our products or packs or paid associate fees during the twelve months ended December 31 was as follows:
2023 2022
New 79,000 54.5 % 75,000 51.7 %
Continuing 66,000 45.5 % 70,000 48.3 %
Total 145,000 100.0 % 145,000 100.0 %
The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions and incentives for that year. The Company collected associate fees in lieu of pack sales within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, Taiwan, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, Spain, Sweden and the United Kingdom.
In the Republic of Korea and Mexico, packs may still be purchased by our associates who wish to build a Mannatech business. These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. Pack sales may be completed during the final stages of the registration process, entitling the Associates to earn commissions and incentives for that year. These packs can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials. We also do not collect associate fees or sell packs in our non-direct selling business in mainland China.
Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications; (iii) training and event registration fees; and (iv) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools are utilized to support our independent associates, which in turn helps stimulate product sales.
For the years ended December 31, 2023 and 2022, other sales were $1.1 million and $0.8 million, respectively.
Gross Profit
For the year ended December 31, 2023, gross profit decreased by $1.3 million, or 1.2%, to $102.9 million, as compared to $104.1 million for the same period in 2022. The decrease in gross profit in dollar terms is principally due to the decline in sales. Gross profit as a percentage of net sales increased to 78.0% for 2023, as compared to 75.9% for 2022, largely due to reduced costs of freight and shipping and other supply chain initiatives, partially offset by certain raw materials price increases.
Commission and Incentives
Commission expenses decreased $1.5 million, or 2.9%, to $51.0 million, for the year ended December 31, 2023, as compared to $52.5 million for the same period in 2022. Commissions are earned on sales. Commission expense in dollar terms decreased in 2023 primarily due to a decline in our sales in the year. Commissions as a percentage of net sales was 38.6% for the year ended December 31, 2023 and 38.2% for the same period in the prior year.
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Incentive costs decreased for the year ended December 31, 2023 by 13.3%, or $0.4 million, to $2.6 million as compared to $3.0 million for the same period in 2022. The decrease was related to travel incentives in the Americas and Asia/Pacific. The costs of incentives, as a percentage of net sales, decreased to 2.0% for the year ended December 31, 2023, as compared to 2.2% for the same period in 2022.
Selling and Administrative Expenses
Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses, accounting, legal, and consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.
For the years ended December 31, 2023 and 2022, overall selling and administrative expenses were $48.6 million and $47.4 million, respectively. The increase of $1.2 million primarily includes $0.9 million increase in legal and consulting fees related to the start-up of our NEMO business, $0.8 million increase in marketing costs, $0.5 million increase in our provision of bad debt, offset by a $1.0 million decrease in payroll and benefits costs .
Depreciation and Amortization Expense
For each of the years ended December 31, 2023 and 2022, depreciation and amortization expense remained constant at $1.6 million.
Other Expense, net
Primarily due to foreign exchange losses, other expense wa s $0.2 million for each of the years ended December 31, 2023 and 2022.
Provision for Income Taxes
Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31:
Country 2023 2022
China 25.0 % 25.0 %
Hong Kong 16.5 % 16.5 %
Japan 36.1 % 34.6 %
Republic of Korea 20.9 % 22.0 %
United States (1)
22.2 % 22.2 %
(1) Includes blended state effective rate of 1.2% for 2023 and 2022 in addition to the U.S federal statutory rate of 21% and is now taxed at the full.
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 each of the years ended December 31, 2023 and 2022, the Company’s effective tax rate was (98.1)% and (837.4)%, respectively. In 2023, the Company’s effective tax rate differed from the statutory rate due to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions. In 2022, the Company's effective 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.
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SEASONALITY
We believe the impact of seasonality on our consolidated results of operations is minimal. We have experienced and believe we will continue to experience variations on our quarterly results of operations in response to, among other things:
• the timing of the introduction of new products and incentives;
• our ability to attract and retain associates and preferred customers;
• the timing of our incentives and contests;
• the general overall economic outlook;
• government regulations;
• the perception and acceptance of network marketing;
• the consumer perception of our products and overall operations; and
• cultural events and vacation patterns (for example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative effect on that quarter).
As a result of these and other factors, our quarterly results may vary significantly in the future. Period-to-period comparisons should not be relied upon as an indication of future performance since we can give no assurances that revenue trends in new markets, as well as in existing markets, will follow our historical patterns. The market price of our common stock may also be adversely affected by the above factors.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Cash and cash equivalents was $7.7 million at December 31, 2023, as compared to $13.8 million as of December 31, 2022. The current portion of restricted cash was $0.9 million at December 31, 2023 and 2022. The Company is required to restrict cash for (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) Australia building lease collateral. Fluctuations in currency rates produced a decrease of $0.8 million in cash and cash equivalents in 2023.
Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends. We have historically funded our business objectives, operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt.
Working Capital
Working capital represents total current assets less total current liabilities. At December 31, 2023, our working capital was $1.9 million as compared to $5.1 million at December 31, 2022. The decrease in working capital principally reflects the decrease in our cash balance which was utilized to fund our operations in 2023, as well as pay down our current liabilities and fund financing activities .
Net Cash Flows
Our net consolidated cash flows consisted of the following, for the years ended December 31 (in millions) :
Provided by / (used in): 2023 2022
Operating activities $ (2.4) $ (2.6)
Investing activities $ (0.7) $ (1.1)
Financing activities $ (1.9) $ (4.3)
Operating Activities
Cash used in operating activities was $2.4 million for the year ended December 31, 2023, as compared to $2.6 million in the prior year.
Investing Activities
For the year ended December 31, 2023 and 2022, we invested $0.7 million and $1.1 million, respectively. During the year ended December 31, 2023, we invested approximately $0.7 million in back-office software projects and equipment, reported as property and equipment. During the year ended December 31, 2022, we invested $1.1 million in computer hardware and software.
Financing Activities
For the year ended December 31, 2023, we utilized $1.9 million for financing activities as compared to $4.3 million for the same period of 2022. For the year ended December 31, 2023, we used approximately $1.0 million in the repayment of finance lease obligations and other long-term liabilities, $0.7 million in the payment of dividends to shareholders, and $0.2 million in the repurchase of common stock. 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 for the repurchase of common stock.
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General Liquidity and Cash Flows
Short Term Liquidity
We believe our existing liquidity and projected cash flows from operations are adequate to fund our normal expected future business operations for the next 12 months. As of December 31, 2023 and 2022, c ash and cash equivalents totaled $7.7 million and $13.8 million, respectively. While our cash utilization in 2022 and 2023 has reduced our short-term liquidity, we do not believe the impact will prohibit us from meeting our obligations or from executing our business strategy. See “Item 1A – Risk Factors – Risks Affecting Our Business and Industry - We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.”
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, 2023, we have one supply agreement that requires the Company to purchase an aggregate of $4.2 million through 2024, with no purchase commitments thereafter. We are currently negotiating with the supplier to amend the agreement to meet current demand levels for these materials. 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, 2023, our operating lease liabilities were $4.3 million, of which $1.7 million was recorded in Accrued expenses and $2.6 million was recorded in Other long-term liabilities. We also have finance lease liabilities of $1.2 million and lease restoration liabilities of $0.4 million.
As our primary source of liquidity has historically been our cash flows from operations, our liquidity is dependent on our ability to maintain and/or continue to improve revenue as compared to our operational expenses. In this regard, our management has established a 2024 business reorganization plan focusing on revenue growth, margin improvement and cost control and reduction. Our current CEO has announced his retirement effective April 1, 2024. However, he has agreed to continue to serve as an advisor to the Company to establish certain programs aimed at increasing our revenues and growing our preferred customer and associate base. Concurrent with the retirement of our existing CEO, our current President and Chief Operating Officer has been promoted to the position of President & CEO. Furthermore, our management has established a plan to improve margin through a price increase, continued focus on supply chain costs, and certain compensation plan adjustments, as well as to reorganize certain functional operations and reduce our fixed selling and administrative overhead.
However, if our reorganization plans are not successful, or if we are unable to renegotiate a favorable outcome to our minimum purchase commitment contracts, or if we experience prolonged workforce disruptions, disruption in our supply chain, and/or potential decreases in consumer demands, our sales and our overall liquidity in the next twelve months could be negatively impacted. If our existing capital resources or cash flows become insufficient to meet current business plans, projections, and existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if at all.
We are a multinational company operating in numerous tax jurisdictions. We are currently not engaged in any tax related audits. 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.
Long Term Liquidity
We believe our cash flows from operations should be adequate to fund our normal expected future business operations and possible international expansion costs for the long term. As our primary source of liquidity has historically been 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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Our future access to the capital markets may be adversely impacted if we fail to maintain compliance with the Nasdaq Marketplace Rules for the continued listing of our stock. We continuously monitor our compliance with the Nasdaq continued listing rules.
MARKET RISKS
Please see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about our Market Risks.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. The application of GAAP requires us to make estimates and assumptions that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of Mannatech at the date of our financial statements. We use estimates throughout our financial statements, which are influenced by management’s judgment and uncertainties. Our estimates are based on historical trends, industry standards, and various other assumptions that we believe are applicable and reasonable under the circumstances at the time the consolidated financial statements are prepared. Our Audit Committee reviews our critical accounting policies and estimates. We continually evaluate and review our policies related to the portrayal of our consolidated financial position and consolidated results of operations that require the application of significant judgment by our management. We also analyze the need for certain estimates, including the need for such items as allowance for credit losses, inventory reserves, tax valuation allowances, revenue recognition, sales returns, deferred revenues, and accounting for stock-based compensation. Historically, actual results have not materially deviated from our estimates. However, we caution readers that actual results could differ from our estimates and assumptions applied in the preparation of our consolidated financial statements. If circumstances change relating to the various assumptions or conditions used in our estimates, we could experience an adverse effect on our financial position, results of operations, and cash flows. We have identified the following applicable critical estimates as of December 31, 2023:
Inventory Reserves
Inventory consists of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs that approximate average costs) or net realizable value. We record the amounts charged by the vendors as the costs of inventory. Typically, the net realizable value of our inventory is higher than the aggregate cost. Determination of net realizable value can be complex and, therefore, requires a high degree of judgment. In order for management to make the appropriate determination of net realizable value, the following items are considered: inventory turnover statistics, current selling prices, seasonality factors, consumer demand, regulatory changes, competitive pricing, and performance of similar products. If we determine the carrying value of inventory is in excess of estimated net realizable value, we write down the value of inventory to the estimated net realizable value.
We also review inventory for obsolescence in a similar manner and any inventory identified as obsolete is reserved or written off. Our determination of obsolescence is based on assumptions about the demand for our products, product expiration dates, estimated future sales, and general future plans. We monitor actual sales compared to original projections, and if actual sales are less favorable than those originally projected by us, we record an additional inventory reserve or write-down. Historically, our estimates have been close to our actual reported amounts. However, if our estimates regarding inventory obsolescence are inaccurate or consumer demand for our products changes in an unforeseen manner, we may be exposed to additional material losses or gains in excess of our established estimated inventory reserves. At each of December 31, 2023 and 2022, our inventory reserves were $0.4 million .
Tax Valuation Allowances
We review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, future management plans, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2023, we maintained a valuation allowance for deferred tax assets arising from our operations of $10.3 million because they did not meet the “more likely than not” criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as of December 31, 2023, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling $1.6 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.
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Transfer Pricing
In many countries, including the U.S., we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our U.S. and foreign entities and are taxed accordingly. In the normal course of business, we are audited by federal, state and foreign tax authorities, and subject to inquiries from those tax authorities regarding the amount of taxes due. These inquiries may relate to the timing and amount of deductions and the allocation of income among various tax jurisdictions. We believe that our tax positions comply with applicable tax law and intend to defend our positions, if necessary. Our effective tax rate in each financial statement period could be impacted if we prevailed in matters for which reserves have been established, or were required to pay amounts more than established reserves.
Revenue Recognition
Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. We recognize revenue from shipped packs and products upon receipt by the customer. We estimate order delivery dates using weighted averages of historical delivery data periodically provided by our freight carriers. We record the value of orders shipped but not yet delivered to customers as Deferred Revenue on our Consolidated Balance Sheet. If our assumptions and estimate of the delivery time from shipment to receipt by the customer changes, the new estimate could have a material impact on our revenues and financial results of operations.
Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (a) the sale of the product and (b) the loyalty program. The Company's customer loyalty program conveys a material right to the customer to redeem loyalty points for the purchase of products. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. The transaction price is allocated between the product sale and the loyalty program on a relative standalone selling price basis. Sales placed through a one-time order contain only the first performance obligation noted above - the sale of the product.
The Company provides associates with access to a complimentary three-month package for the Success TrackerTM and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations: (a) the associate fee, whereby the Company provides an associate with the right to earn commissions, bonuses and incentives for a year, (b) three months of complimentary access to utilize the Success Tracker™ online tool and (c) three months of complimentary access to utilize the Mannatech+ online business tool. The transaction price is allocated between the three performance obligations on a relative standalone selling price basis and revenue is recognized over the period that access to the tool is active. Associates do not have complimentary access to online business tools after the first contractual period.
With regard to both of the aforementioned contracts, the Company determines the standalone selling prices by using observable inputs which includes the Company’s standard published price lists.
Product Return Policy
We stand behind our products and believe we offer a reasonable and industry-standard product return policy to all of our customers. We do not resell returned products. Refunds are not processed until proper approval is obtained. Refunds are processed and returned in the same form of payment that was originally used in the sale. Each country in which we operate has specific product return guidelines. However, we allow our associates and preferred customers to exchange products as long as the products are unopened and in good condition. Our return policies for our retail customers and our associates and preferred customers are as follows:
• Retail Customer Product Return Policy. This policy allows a retail customer to return any of our products to the original associate who sold the product and receive a full cash refund from the associate for the first 180 days following the product’s purchase if located in the United States and Canada, and for the first 90 days following the product’s purchase in other countries where we sell our products. The associate may return or exchange the product based on the associate product return policy. In China, where we sell our products under a cross-border e-commerce model, we have a 14-day return policy.
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• Associate and Preferred Customer Product Return Policy. This policy allows the associate or preferred customer to return an order within one year of the purchase date upon voluntarily terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% processing fee. We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies in the United States and Canada, only for the first 180 days following the product’s purchase and applies in other countries where we sell our products for the first 90 days following the product’s purchase; however, any commissions earned by an associate will be deducted from the refund. If we discover abuse of the refund policy, we may terminate the associate's or preferred customer's account.
The Company utilizes the expected value method, as set forth by ASC Topic 606, to estimate the sales returns and allowance liability by taking the weighted average of the sales return rates over a rolling six-month period. The Company allocates the total amount recorded within the sales return and allowance liability as a reduction of the overall transaction price for the Company’s product sales. The Company deems the sales refund and allowance liability to be a variable consideration. The method for estimating the sales returns and allowance liability has remained consistent as a result of adopting ASC Topic 606.
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