MANNATECH INC 10-K

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 years ended December 31, 2024 and 2023. 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, Thailand, Taiwan, Hong Kong, and China). We also ship our products to customers in the following countries: Belgium, France, Greece, Italy, Luxembourg, and Poland. During the second quarter of 2024, the Company liquidated its entity in Sweden, Mannatech Sverige AB. We conduct our business as a single operating segment and primarily sell our products through a network of approximately 133,000 active associates and preferred customer positions held by individuals that purchased our products and/or packs or paid associate fees during the last twelve months, who we refer to as current associates and preferred customers . New pack sales and the receipt of new associate fees in connection with new positions in our network are leading indicators for the long-term success of our business. New associate or preferred customer positions are created in our network when our associate fees are paid, or packs and products are purchased for the first time under a new account. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins. Because we sell our products principally through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of current associates and preferred customers that occupy sales or purchasing positions in our network; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure. Our subsidiary 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, 2024 was $117.9 million , as compared to $132.0 million for the year ended December 31, 2023 . Net sales decreased $14.1 million, or 10.7%, for 2024, as compared to 2023 . Our 2024 net sales declined $11.4 million, or 8.6%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.7 million decrease in GAAP net sales as compared to 2023. We generated operating income of $1.4 million for the year ended December 31, 2024, as compared to an operating loss of $ 1.0 million for the same period last year. Our 2024 operating income, on a Constant dollar basis (see Non-GAAP Financial Measures, below), was $2.2 million. On a consolidated basis, the strength of the U.S. dollar against the Korean Won during 2024, provided a foreign currency gain of $2.6 million in other income. This resulted in net income of $2.5 million, or $1.32 per diluted share, for the year ended December 31, 2024, as compared to a net loss of $2.2 million, or $1.20 per diluted share for the year ended December 31, 2023. 42 RESULTS OF OPERATIONS Year Ended December 31, 2024 compared to Year Ended December 31, 2023 The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2024 and 2023 (in thousands, except percentages) . 2024 2023 Change Total Dollars % of net sales Total Dollars % of net sales Dollar Percentage Net sales $ 117,866 100.0 % $ 131,955 100.0 % $ (14,089) (10.7) % Cost of sales 26,406 22.4 % 29,090 22.0 % (2,684) (9.2) % Gross profit 91,460 77.6 % 102,865 78.0 % (11,405) (11.1) % Operating expenses: Commissions and incentives 48,309 41.0 % 53,588 40.6 % (5,279) (9.9) % Selling and administrative expenses 41,722 35.4 % 50,241 38.1 % (8,519) (17.0) % Total operating expenses 90,031 76.4 % 103,829 78.7 % (13,798) (13.3) % Income (loss) from operations 1,429 1.2 % (964) (0.7) % 2,393 (248.2) % Interest (expense) income (279) (0.2) % 4 — % (283) (7,075.0) % Other income (expense), net 2,590 2.2 % (170) (0.1) % 2,760 1,623.5 % Income (loss) before income taxes 3,740 3.2 % (1,130) (0.9) % 4,870 431.0 % Income tax provision (1,250) (1.1) % (1,109) (0.8) % (141) 12.7 % Net income (loss) $ 2,490 2.1 % $ (2,239) (1.7) % $ 4,729 211.2 % 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 Income (Loss) from Operations. We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends 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 At December 31, 2024, our net sales declined $11.4 million, or 8.6% on a Constant dollar basis (see reconciliation of Non-GAAP Financial Measures in the table below); unfavorable foreign exchange caused a $2.7 million decrease in GAAP net sales as compared to the same period in 2023. A reconciliation of non-GAAP financial measures to GAAP results for the year ended December 31, 2024 and 2023 is presented as follows (in millions, except percentages): 2024 2023 Constant Dollar Change GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Net sales $ 117.9 $ 2.7 $ 120.6 $ 132.0 $ (11.4) (8.6) % Gross profit $ 91.5 $ 2.2 $ 93.7 $ 102.9 $ (9.2) (8.9) % Income (loss) from operations $ 1.4 $ 0.8 $ 2.2 $ (1.0) $ 3.2 (320.0) % 43 Net Sales by Region For the years ended December 31, 2024, our operations outside of the Americas accounted for 66.3% of our consolidated net sales, as compared to 67.6% in 2023. Consolidated net sales by region for the years ended December 31, 2024 and 2023 were as follows (in millions, except percentages) : 2024 2023 Americas $ 39.7 33.7 % $ 42.8 32.4 % Asia/Pacific 69.0 58.5 % 79.4 60.2 % EMEA 9.2 7.8 % 9.8 7.4 % Total $ 117.9 100.0 % $ 132.0 100.0 % Consolidated domestic and foreign net sales for the years ended December 31, 2024 and 2023 were as follows (in millions, except percentages) : 2024 2023 Domestic $ 28.0 23.7 % $ 30.2 22.9 % Foreign 89.9 76.3 % 101.8 77.1 % Total $ 117.9 100.0 % $ 132.0 100.0 % Sales for the Americas decreased by $3.1 million, or 7.2%, to $39.7 million for 2024 as compared to $42.8 million for the same period in 2023. This decrease was primarily due to a 8.6% decline in the number of active independent associates and preferred customers, which was partially offset by a 1.5% increase in revenue per active independent associate and preferred customer. Sales in the Americas includes the Mexico region. As a result of the weakening of the Mexican Peso in 2024, foreign currency exchange had the effect of decreasing revenue by $0.1 million for the year ended December 31, 2024, as compared to the same period in 2023. During 2024, Asia/Pacific sales decreased by $10.4 million, or 13.1%, to $69.0 million as compared to $79.4 million for 2023. Foreign currency exchange had the effect of decreasing revenue in 2024 by $2.7 million, as compared to the same period in 2023. The currency impact is primarily due to the weakening of the Korean Won and Japanese Yen. In addition, net sales in the Asia/Pacific region was negatively impacted by a 4.5% decrease in revenue per active independent associate and preferred customer. The number of active independent associates and preferred customers in the Asia/Pacific region decreased 9.0% in 2024 as compared to 2023 . For the year ended December 31, 2024, EMEA sales decreased by $0.6 million, or 6.1%, to $9.2 million as compared to $9.8 million for 2023. This decrease was primarily due to a 6.9% decrease in the number of active independent associates and preferred customers, which was partially offset by a 0.9% increase in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of increasing revenue by $0.1 million for the year ended December 31, 2024, as compared to the same period in 2023. The currency impact is primarily due to the strengthening of the South African Rand and British Pound. Our sales mix for the years ended December 31, was as follows (in millions, except percentages): 2024 2023 Constant Dollar Change GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Product sales $ 112.3 $ 2.5 $ 114.8 $ 125.3 $ (10.5) (8.4) % Pack sales and associate fees 4.1 0.2 4.3 5.6 (1.3) (23.2) % Other 1.5 — 1.5 1.1 0.4 36.4 % Total $ 117.9 $ 2.7 $ 120.6 $ 132.0 $ (11.4) (8.6) % 44 Product Sales 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, 2024 decreased by $13.0 million, or 10.4%, to $112.3 million, as compared to $125.3 million for the same period in 2023. On a constant dollar basis, product sales in 2024 decreased $10.5 million, or 8.4%, as compared to 2023. The decrease in product sales in 2024 reflects a 7.2% decrease in the number of orders processed and a decrease in the average order value of $172, as compared to $180 for the same period in 2023. We attribute the lower number of orders processed in 2024 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 2024. 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: 2024 2023 New 63,000 47.4 % 79,000 54.5 % Continuing 70,000 52.6 % 66,000 45.5 % Total 133,000 100.0 % 145,000 100.0 % Pack Sales and Associate Fees The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions 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. Pack sales and associate fees for the year ended December 31, 2024 decreased by $1.5 million, or 26.8%, to $4.1 million, as compared to $5.6 million for the same period in 2023. On a constant dollar basis, pack sales and associate fees in 2024 decreased $1.3 million, or 23.2%, as compared to 2023. The decrease in pack sales and associate fees in 2024 reflects a 3.7% decrease in the number of orders processed and a 24.2% decrease in the average order value of $49, as compared to $65 for the same period in 2023. Other Sales Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications; (iii) training and event registration fees; and (iv) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools are utilized to support our independent associates, which in turn helps stimulate product sales. For the years ended December 31, 2024 and 2023, other sales were $1.5 million and $1.1 million, respectively. Gross Profit For the year ended December 31, 2024, gross profit decreased by $11.4 million, or 11.1%, to $91.5 million, as compared to $102.9 million for the same period in 2023. The decrease in gross profit in dollar terms is principally due to the 45 decline in sales. Gross profit as a percentage of net sales decreased to 77.6% for 2024, as compared to 78.0% for 2023, largely due to increased costs related to supply chain challenges, including increased product costs and increased freight costs. Commission and Incentives Commission expenses decreased $4.8 million, or 9.4%, to $46.2 million, for the year ended December 31, 2024, as compared to $51.0 million for the same period in 2023. Commissions are earned on sales. Commission expense in dollar terms decreased in 2024 primarily due to a decline in our sales in the year. Commissions as a percentage of net sales was 39.2% for the year ended December 31, 2024 and 38.6% for the same period in the prior year. Incentive costs decreased for the year ended December 31, 2024 by 19.2%, or $0.5 million, to $2.1 million as compared to $2.6 million for the same period in 2023. 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 1.8% for the year ended December 31, 2024, as compared to 2.0% for the same period in 2023. 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; accounting, legal and consulting fees; compensation to our board of directors; warehouse and fulfillment costs; depreciation and amortization; marketing-related expenses; travel and entertainment expenses; credit card processing fees; costs for software maintenance agreements; insurance; charitable contributions; office lease expense; utilities; bad debt; and other miscellaneous operating expenses. For the years ended December 31, 2024 and 2023, overall selling and administrative expenses were $41.7 million and $50.2 million, respectively. The decrease of $8.5 million primarily includes a $3.2 million decrease in payroll related costs, $1.6 million decrease in legal and consulting fees, $1.5 million decrease in marketing costs, $0.6 million decrease in miscellaneous operating expenses, $0.5 million decrease in travel and entertainment costs, $0.5 million decrease in office expenses, $0.4 million decrease in credit card fees and a $0.2 million decrease in contract labor costs. Depreciation and Amortization Expense At December 31, 2024 and 2023, depreciation and amortization expense was $1.5 million and $1.6 million, respectively. Other Income (expense), net Primarily due to foreign exchange gains, other income wa s $2.6 million for the year ended December 31, 2024. At December 31, 2023, other expense was $0.2 million, primarily due to foreign exchange losses. Income Tax (Provision) Benefit 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 2024 2023 China 25.0 % 25.0 % Hong Kong 16.5 % 16.5 % Japan 34.6 % 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 2024 and 2023 in addition to the U.S federal statutory rate of 21%. 46 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, 2024 and 2023, the Company’s effective tax rate was 33.4% and (98.1)%, respectively. In 2024 and 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. 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. 47 LIQUIDITY AND CAPITAL RESOURCES Cash and Cash Equivalents Cash and cash equivalents was $11.4 million at December 31, 2024, as compared to $7.7 million as of December 31, 2023. 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. The current portion of restricted cash was $0.6 million and $0.9 million at December 31, 2024 and 2023, respectively. The long-term portion of restricted cash was $0.6 million and $0.7 million at December 31, 2024 and 2023, respectively. Fluctuations in currency rates produced a decrease of $0.8 million in cash and cash equivalents in 2024. 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, 2024, our working capital was $5.2 million as compared to $1.9 million at December 31, 2023. The increase in working capital principally reflects the increase in our cash balance which was utilized to fund our operations in 2024, 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): 2024 2023 Operating activities $ 2.3 $ (2.4) Investing activities $ (0.3) $ (0.7) Financing activities $ 2.0 $ (1.9) Operating Activities Cash provided in operating activities was $2.3 million for the year ended December 31, 2024, as compared to a use of cash of $2.4 million in the prior year. The primary factors driving the improvement in cash flow from operating activities were net income of $2.5 million compared to a net loss of $2.2 million and an Unrealized FX gain of $3.3 million compared to $0 for the years ended December 31, 2024 and 2023, respectively. Investing Activities For the years ended December 31, 2024 and 2023, we invested $0.3 million and $0.7 million, respectively. During the years ended December 31, 2024 and 2023, we invested approximately $0.3 million and $0.7 million in back-office software projects and equipment, reported as property and equipment, respectively. Financing Activities For the year ended December 31, 2024, our financing activities provided cash of $2.0 million as compared to a use of cash of $1.9 million for the same period of 2023. During 2024, we received $3.6 million from the issuance of notes payable (see Note 10, Notes Payable) and we used $1.6 million in the repayment of finance lease obligations. 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 for the repurchase of common stock. 48 General Liquidity and Cash Flows Short Term Liquidity As of December 31, 2024 and 2023, our c ash and cash equivalents totaled $11.4 million and $7.7 million, respectively. We believe our existing liquidity and cash flows from operations are adequate to fund our normal expected future business operations for the next twelve months. On April 23, 2024, the Company entered into unsecured Loan and Promissory Note agreements with three related parties, who are members of the Company’s Board of Directors, and who are current stockholders of the Company, in an aggregate principal amount of $3.6 million (see Note 10, Notes Payable). The purpose of the borrowing was to provide funds to the Company for general working capital needs, including payment to vendors, expansion of the Company’s non-US operations, technology investment primarily for improving the customer ordering process and software updates to improve visibility of sales associate activity. We have contractual purchase commitments with certain raw material suppliers to purchase minimum quantities. At December 31, 2024, we have one supply agreement which was amended on April 18, 2024, that requires the Company to purchase an aggregate of $1.1 million through 2025, 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 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, 2024, our operating lease liabilities were $2.8 million, of which $1.2 million is presented as the current portion and $1.6 million is presented as Operating lease liabilities excluding current portion on our Consolidated Balance Sheets. We also have finance lease liabilities of $1.0 million and lease restoration liabilities of $0.3 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, including 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 experience further or unexpected 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 12, Commitments and Contingencies, and Note 13, 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. Our future access to the capital markets may be adversely impacted if we fail to maintain compliance with the Nasdaq Marketplace Rules for the continued listing of our stock. We continuously monitor our compliance with the Nasdaq continued listing rules. 49 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, 2024: 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 December 31, 2024 and 2023, our inventory reserves were $0.6 million and $0.4 million, respectively. 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, 2024, we maintained a valuation allowance for deferred tax assets arising from our operations of $6.9 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, 2024, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling $1.8 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. 50 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. During the quarter ended September 30, 2024 the Company changed its shipping terms with customers such that ownership transfers upon delivery to the freight carrier, satisfying the Company's performance obligation. Previously, the Company's shipping terms were Free on Board ("FOB") destination, so the Company recognized revenue upon delivery of the product to the customer and we recorded the value of orders shipped but not yet delivered to customers as Deferred Revenue on our Consolidated Balance Sheets. Corporate-sponsored event revenue is recognized when the event is held. Orders placed by associates or preferred customers constitute our contracts with customers. 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 delivery 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. 51 • 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 any shipping cost, if applicable. 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. 52