MANNATECH INC 10-Q

Item 1. Financial Statements MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) ASSETS September 30, 2023 (unaudited) December 31, 2022 Cash and cash equivalents $ 7,928 $ 13,777 Restricted cash 938 944 Accounts receivable, net of allowance o f $1,315 and $973 in 2023 and 2022, respectively 149 218 Income tax receivable 418 423 Inventories, net 15,332 14,726 Prepaid expenses and other current assets 2,040 2,389 Deferred commissions 1,779 2,476 Total current assets 28,584 34,953 Property and equipment, net 4,326 3,759 Long-term restricted cash 821 476 Other assets 7,277 8,439 Deferred tax assets, net 1,198 1,501 Total assets $ 42,206 $ 49,128 LIABILITIES AND SHAREHOLDERS’ EQUITY Current portion of finance leases $ 272 $ 61 Accounts payable 3,879 4,361 Accrued expenses 7,547 7,510 Commissions and incentives payable 9,051 9,256 Taxes payable 1,311 3,281 Current notes payable 303 263 Deferred revenue 3,949 5,106 Total current liabilities 26,312 29,838 Finance leases, excluding current portion 1,022 88 Other long-term liabilities 4,172 5,026 Total liabilities 31,506 34,952 Commitments and contingencies Shareholders’ equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding — — Common stock, $0.0001 par value, 99,000,000 shares authorized, 2,742,857 shares issued and 1,860,154 s hares outstanding as of September 30, 2023 and 2,742,857 shares issued and 1,858,800 shares outstanding as of December 31, 2022 — — Additional paid-in capital 33,301 33,377 Retained earnings 455 1,686 Accumulated other comprehensive (loss) ( 2,547 ) ( 208 ) Treasury stock, at average cost, 882,703 s hares as of September 30, 2023 and 884,057 shares as of December 31, 2022 ( 20,509 ) ( 20,679 ) Total shareholders’ equity 10,700 14,176 Total liabilities and shareholders’ equity $ 42,206 $ 49,128 See accompanying notes to unaudited consolidated financial statements. 2 Table of Contents MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS – (UNAUDITED) (in thousands, except per share information) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales $ 32,553 $ 35,513 $ 99,261 $ 102,873 Cost of sales 6,625 7,416 21,042 22,427 Gross profit 25,928 28,097 78,219 80,446 Operating expenses: Commissions and incentives 13,178 14,242 40,200 41,487 Selling and administrative expenses 6,946 6,656 20,619 20,479 Depreciation and amortization expense 450 716 1,224 1,349 Other operating costs 5,182 5,126 16,245 14,886 Total operating expenses 25,756 26,740 78,288 78,201 Income (loss) from operations 172 1,357 ( 69 ) 2,245 Interest (expense) income, net ( 17 ) 19 ( 3 ) 57 Other income, net 320 287 803 288 Income before income taxes 475 1,663 731 2,590 Income tax provision ( 457 ) ( 472 ) ( 1,214 ) ( 571 ) Net income (loss) $ 18 $ 1,191 $ ( 483 ) $ 2,019 Income (loss) per common share: Basic $ 0.01 $ 0.62 $ ( 0.26 ) $ 1.05 Diluted $ 0.01 $ 0.61 $ ( 0.26 ) $ 1.01 Weighted-average common shares outstanding: Basic 1,863 1,906 1,868 1,932 Diluted 1,863 1,949 1,868 2,017 MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS – (UNAUDITED) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ 18 $ 1,191 $ ( 483 ) $ 2,019 Foreign currency translations ( 889 ) ( 2,561 ) ( 2,339 ) ( 5,395 ) Comprehensive loss $ ( 871 ) $ ( 1,370 ) $ ( 2,822 ) $ ( 3,376 ) See accompanying notes to unaudited consolidated financial statements. 3 Table of Contents MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – (UNAUDITED) (in thousands) Common stock Par value Additional paid-in capital Retained earnings (accumulated deficit) Accumulated other comprehensive loss Treasury stock Total shareholders’ equity Balance at January 1, 2023 $ — $ 33,377 $ 1,686 $ ( 208 ) $ ( 20,679 ) $ 14,176 Net income — — 604 — — 604 Payment of cash dividends — — ( 375 ) — — ( 375 ) Charge related to stock-based compensation — 11 — — — 11 Issuance of unrestricted shares — ( 76 ) — — 299 223 Stock option exercises — ( 35 ) — 47 12 Foreign currency translations — — — ( 799 ) — ( 799 ) Balance at March 31, 2023 $ — $ 33,277 $ 1,915 $ ( 1,007 ) $ ( 20,333 ) $ 13,852 Net loss — — ( 1,105 ) — — ( 1,105 ) Payment of cash dividends — — ( 373 ) — — ( 373 ) Charge related to stock-based compensation — 17 — — — 17 Repurchase of common stock — — — — ( 98 ) ( 98 ) Foreign currency translations — — — ( 651 ) — ( 651 ) Balance at June 30, 2023 $ — $ 33,294 $ 437 $ ( 1,658 ) $ ( 20,431 ) $ 11,642 Net income — — 18 — — 18 Charge related to stock-based compensation — 7 — — — 7 Repurchase of common stock — — — — ( 78 ) ( 78 ) Foreign currency translations — — — ( 889 ) — ( 889 ) Balance at September 30, 2023 $ — $ 33,301 $ 455 $ ( 2,547 ) $ ( 20,509 ) $ 10,700 4 Table of Contents Common stock Par value Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total shareholders’ equity Balance at January 1, 2022 $ — $ 33,277 $ 7,708 $ 2,342 $ ( 18,915 ) $ 24,412 Net income — — 134 — — 134 Payment of cash dividends — — ( 390 ) — — ( 390 ) Charge related to stock-based compensation — 7 — — — 7 Issuance of unrestricted shares — 97 — — 143 240 Stock option exercises — ( 22 ) — — 22 — Foreign currency translations — — — ( 673 ) — ( 673 ) Balance at March 31, 2022 $ — $ 33,359 $ 7,452 $ 1,669 $ ( 18,750 ) $ 23,730 Net income — — 694 — — 694 Payment of cash dividends — — ( 390 ) — — ( 390 ) Charge related to stock-based compensation — 48 — — — 48 Repurchase of common stock — — — — ( 643 ) ( 643 ) Foreign currency translations — — — ( 2,161 ) — ( 2,161 ) Balance at June 30, 2022 $ — $ 33,407 $ 7,756 $ ( 492 ) $ ( 19,393 ) $ 21,278 Net income — — 1,191 — — 1,191 Payment of cash dividends — — ( 380 ) — — ( 380 ) Charge related to stock-based compensation — 11 — — — 11 Repurchase of common stock — — — — ( 928 ) ( 928 ) Foreign currency translations — — — ( 2,561 ) — ( 2,561 ) Balance at September 30, 2022 $ — $ 33,418 $ 8,567 $ ( 3,053 ) $ ( 20,321 ) $ 18,611 See accompanying notes to unaudited consolidated financial statements. 5 Table of Contents MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED) (in thousands) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ( 483 ) 2,019 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,224 1,349 Non-cash operating lease expense 1,232 1,550 Provision for inventory losses 279 465 Provision for (reversal of) allowance for credit losses 345 ( 132 ) Loss (Gain) on disposal of assets 7 ( 3 ) Charge related to stock-based compensation 259 306 Deferred income taxes 303 ( 145 ) Changes in operating assets and liabilities: Accounts receivable ( 276 ) ( 48 ) Income tax receivable 5 ( 26 ) Inventories ( 885 ) ( 3,696 ) Prepaid expenses and other current assets 946 1,583 Deferred commissions 697 ( 205 ) Other assets 213 656 Accounts payable ( 482 ) 612 Accrued expenses ( 247 ) ( 3,459 ) Other long-term liabilities ( 854 ) 3 Taxes payable ( 1,970 ) ( 246 ) Commissions and incentives payable ( 205 ) ( 1,209 ) Deferred revenue ( 1,157 ) 1,085 Net cash (used in) provided by operating activities ( 1,049 ) 459 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ( 540 ) ( 889 ) Proceeds from sale of assets 1 — Net cash used in investing activities ( 539 ) ( 889 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock options exercised 12 — Repurchase of common stock ( 176 ) ( 1,571 ) Payment of cash dividends ( 748 ) ( 1,160 ) Repayment of finance lease obligations and other long-term liabilities ( 717 ) ( 583 ) Net cash used in financing activities ( 1,629 ) ( 3,314 ) Effect of currency exchange rate changes on cash and cash equivalents ( 2,293 ) ( 5,417 ) Net decrease in cash, cash equivalents, and restricted cash ( 5,510 ) ( 9,161 ) Cash, cash equivalents, and restricted cash at the beginning of the period 15,197 25,632 Cash, cash equivalents, and restricted cash at the end of the period $ 9,687 $ 16,471 See accompanying notes to unaudited consolidated financial statements. 6 Table of Contents Nine Months Ended September 30, 2023 2022 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid $ 2,511 $ 690 Interest paid on finance leases and other financing arrangements 72 24 Assets acquired through other financing arrangements 597 638 Operating lease right-of-use assets acquired in exchange for new operating lease liabilities 284 1,739 Finance lease right-of-use assets acquired in exchange for new finance lease liabilities 1,305 92 Treasury shares exchanged for stock options exercised — 22 See accompanying notes to unaudited consolidated financial statements. 7 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Flower Mound, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the Nasdaq Global Select Market under the symbol “MTEX”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products. We currently sell our products into three regions: (i) the Americas (the United States, Canada and Mexico); (ii) 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). Active business building associates ("independent associates" or "associates" or "distributors") and preferred customers purchase the Company’s products at published wholesale prices. The Company cannot distinguish products sold for personal use from other sales when sold to associates, because it is not involved with the products after delivery, other than usual and customary product warranties and returns. Only associates are eligible to earn commissions and incentives. We also ship our products to customers in the following countries: Belgium, France, Greece, Italy, Luxembourg, and Poland. The Company operates a non-direct selling business in mainland China. Our subsidiary in China, Meitai Daily Necessity & Health Products Co., Ltd. (“Meitai”), is operating as a traditional retailer under a cross-border e-commerce model in China. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the Company’s consolidated financial statements and footnotes contained herein do not include all of the information and footnotes required by GAAP to be considered “complete financial statements”. However, in the opinion of the Company’s management, the accompanying unaudited consolidated financial statements and footnotes contain all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s consolidated financial information as of, and for, the periods presented. The Company cautions that its consolidated results of operations for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, 2022 consolidated balance sheet was included in the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2022 and filed with the United States Securities and Exchange Commission (the “SEC”) on March 17, 2023 (the “2022 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 2022 Annual Report. Principles of Consolidation The consolidated financial statements and footnotes include the accounts of Mannatech and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of the Company’s consolidated financial statements in accordance with GAAP requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors. The Company continually evaluates the information used to make these estimates as the business and economic environment changes. Historically, actual results have not varied materially from the Company’s estimates and the Company does not currently anticipate a significant change in its assumptions related to these estimates. However, actual results may differ from these estimates under different assumptions or conditions. The use of estimates is pervasive throughout the consolidated financial statements, but the accounting policies and estimates considered the most significant are described in this note to the consolidated financial statements, Organization and Summary of Significant Accounting Policies . 8 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Cash, Cash Equivalents, and Restricted Cash The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company includes in its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are received within 24 to 72 hours. At each of September 30, 2023 and December 31, 2022, credit card receivables were $ 1.9 million. As of September 30, 2023 and December 31, 2022, cash and cash equivalents held in bank accounts in foreign countries totaled $ 3.8 million and $ 11.3 million, respectively. The Company invests cash in liquid instruments, such as money market funds and interest-bearing deposits. The Company holds cash in high quality financial institutions and does not believe it has an excessive exposure to credit concentration risk. A significant portion of our cash and cash equivalent balances were concentrated within the Republic of Korea, with total net assets within this foreign location totaling $ 26.2 million and $ 21.3 million at September 30, 2023 and December 31, 2022, respectively. In addition, for the three and nine months ended September 30, 2023 and 2022, a concentrated portion of our operating cash flows were earned from operations within the Republic of Korea. An adverse change in economic conditions within the Republic of Korea could negatively affect the Company’s results of operations. 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) the Australia building lease collateral. At September 30, 2023 and December 31, 2022, our total restricted cash was $ 1.8 million and $ 1.4 million, respectively. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows (in thousands) : September 30, 2023 December 31, 2022 Cash and cash equivalents at beginning of period $ 13,777 $ 24,185 Current restricted cash at beginning of period 944 944 Long-term restricted cash at beginning of period 476 503 Cash, cash equivalents, and restricted cash at beginning of period $ 15,197 $ 25,632 Cash and cash equivalents at end of period $ 7,928 $ 13,777 Current restricted cash at end of period 938 944 Long-term restricted cash at end of period 821 476 Cash, cash equivalents, and restricted cash at end of period $ 9,687 $ 15,197 Accounts Receivable Accounts receivable are carried at their estimated collectible amounts. Receivables are created upon shipment of an order if the credit card payment is rejected or does not match the order total. As of September 30, 2023 and December 31, 2022, receivables consisted primarily of amounts due from preferred customers and associates. At September 30, 2023 and December 31, 2022, the Company's accounts receivable balances (net of allowance) were $ 0.1 million and $ 0.2 million, respectively. Upon adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), the Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when the Company identifies specific customers with known disputes or collectability issues. Expected loss estimates are determined utilizing an aging schedule. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. At September 30, 2023 and December 31, 2022, the Company held an allowance for credit losses of $ 1.3 million and $ 1.0 million, respectively. December 31, 2022 Charged to Cost and Expenses Deductions September 30, 2023 Allowance for credit losses ( 000's) $ 973 $ 344 $ ( 2 ) $ 1,315 9 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Inventories Inventories consist 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. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reserved or written off. Other Assets As of September 30, 2023 and December 31, 2022, other assets were $ 7.3 million and $ 8.4 million, respectively. These amounts primarily consisted of right-of-use assets related to operating leases for office space and equipment, net of lease incentives, o f $ 3.7 million and $ 4.6 million as of September 30, 2023 and December 31, 2022, respectively. See Note 8, Leases, for more information on these assets. Also included in Other Assets were deposits for building leases in various locations of $ 1.3 million for each of September 30, 2023 and December 31, 2022 . Additionally, included in the September 30, 2023 and December 31, 2022 balances was $ 2.1 million and $ 2.3 million, respectively, representing a deposit with Mutual Aid Cooperative and Consumer in the Republic of Korea, an organization established by the Republic of Korea’s Fair Trade Commission to protect consumers who participate in network marketing activities. Finally, each of the September 30, 2023 and December 31, 2022 balances included $ 0.2 million of indefinite lived intangible assets relating to the Manapol® powder trademark. Accrued Expenses At each of September 30, 2023 and December 31, 2022, accrued expenses were $ 7.5 million. These amounts primarily consisted of $ 2.1 million and $ 1.4 million representing employee benefits, which included accrued wages, bonus and severance at September 30, 2023 and December 31, 2022, respectively. Also included in the September 30, 2023 and December 31, 2022 balances were non-inventory accrued liabilities of $ 1.7 million and $ 2.8 million, respectively. Additionally, included in the September 30, 2023 and December 31, 2022 balances were $ 1.7 million and $ 1.6 million for the current portion of operating lease liabilities, respectively. At September 30, 2023 and December 31, 2022, also included in the balances were $ 0.8 million and $ 1.0 million for accrued auditing and accounting fees, respectively. As of September 30, 2023 and December 31, 2022, other accrued expenses were $ 1.2 million and $ 0.7 million, respectively. Notes Payable Notes payable were $ 0.3 million at each of September 30, 2023 and December 31, 2022, as a result of short-term financing arrangements for insurance policies. At each of September 30, 2023 and December 31, 2022, the current portion were $ 0.3 million. There was no long-term portion at either period. Other Long-Term Liabilities Other long-term liabilities were $ 4.2 million and $ 5.0 million as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023 and December 31, 2022, the balance is primarily composed of long-term operating lease obligations of $ 3.0 million and $ 4.2 million, respectively. See Note 8, Leases, for more information. Certain operating leases for the Company’s regional office facilities contain a restoration clause that requires the Company to restore the premises to its original condition. At each of September 30, 2023 and December 31, 2022, accrued restoration costs related to these leases amounted to $ 0.3 million. At each of September 30, 2023 and December 31, 2022, the Company also recorded a long-term liability for estimated defined benefit obligation related to a non-U.S. defined benefit plan for its Japan operations of $ 0.2 million (see Note 9, Employee Benefit Plans , of the Company’s 2022 Annual Report). 10 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition The Company’s revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of the Company’s product sales are made at published wholesale prices to associates and preferred customers. The Company records revenue net of any sales taxes and records a reserve for expected sales returns based on its historical experience. The Company recognizes revenue from shipped products when control of the product transfers to the customer, thus the performance obligation is satisfied. Corporate-sponsored event revenue is recognized when the event is held. Revenues from associate fees relate to providing associates with the right to earn commissions, benefits and incentives for an annual period. Revenue from software tools included in the first contractual year is recognized over three months and revenue from associate fees is recognized over twelve months (see Contracts with Multiple Performance Obligations for recognition guidelines). Almost all orders are paid via credit card. See Note 10, Segment Information, for disaggregation of revenues by geographic segment and type. The Company collected associate fees 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. Contracts with Multiple Performance Obligations 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. 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 Tracker TM 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. Associates do not have complimentary access to online business tools after the first contractual period. Deferred Commissions The Company defers commissions on (i) the sales of products shipped but not received by 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 $ 2.5 million for the year ended December 31, 2022. Of this balance, $ 0.8 million was amortized to commissions expense for the nine months ended September 30, 2023. At September 30, 2023, deferred commissions were $ 1.8 million. Deferred Revenue The Company defers certain components of its revenue. Deferred revenue consisted of: (i) sales of products shipped but not received by 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, 2022, the Company’s deferred revenue was $ 5.1 million. Of this balance, $ 1.8 million was recognized as revenue for the nine months ended September 30, 2023. At September 30, 2023, the Company’s deferred revenue was $ 3.9 million. 11 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The Company’s 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 orders. 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. During the preparation of our consolidated financial statements for the three-months ended June 30, 2023, an immaterial error was identified in the calculation of breakage relating to our loyalty program. To correct the error, we recognized an out of period adjustment resulting in an accumulated increase in revenues of $1.4 million for the nine months ended September 30, 2023. The out of period adjustment also resulted in an accumulated increase in commission expense of $0.5 million for the nine months ended September 30, 2023. The deferred revenue associated with the loyalty program at each of September 30, 2023 and December 31, 2022 was $ 2.9 million and $ 4.2 million, respectively. Loyalty program (in thousands) Loyalty deferred revenue as of January 1, 2022 $ 4,292 Loyalty points forfeited or expired ( 3,387 ) Loyalty points used ( 10,543 ) Loyalty points vested 12,773 Loyalty points unvested 1,032 Loyalty deferred revenue as of December 31, 2022 $ 4,167 Loyalty deferred revenue as of January 1, 2023 $ 4,167 Loyalty points forfeited or expired ( 3,176 ) Loyalty points used ( 6,846 ) Loyalty points vested 7,880 Loyalty points unvested 867 Loyalty deferred revenue as of September 30, 2023 $ 2,892 Sales Refunds and Allowances The Company utilizes the expected value method, as set forth by Accounting Standard Codification ("ASC") Topic 606 Revenue from Contracts with Customers ("ASC 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. Historically, sales returns have not materially changed through the years, as the majority of our customers who return their 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. As of each of the periods set forth below , our sales return reserve consisted of the following (in thousands): 12 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Sales reserve as of January 1, 2022 $ 55 Provision related to sales made in current period 783 Adjustment related to sales made in prior periods ( 4 ) Actual returns or credits related to current period ( 730 ) Actual returns or credits related to prior periods ( 45 ) Sales reserve as of December 31, 2022 $ 59 Sales reserve as of January 1, 2023 $ 59 Provision related to sales made in current period 562 Adjustment related to sales made in prior periods 219 Actual returns or credits related to current period ( 520 ) Actual returns or credits related to prior periods ( 271 ) Sales reserve as of September 30, 2023 $ 49 Shipping and Handling Costs The Company records inbound freight as a component of inventory and cost of sales. The Company records freight and shipping fees collected from its customers as fulfillment costs. In accordance with ASC 606-10-25-18a, freight and shipping fees are not deemed to be separate performance obligations as these activities occur before the customer receives the product. Commissions and Incentives Associates earn commissions and incentives based on their direct and indirect commissionable net sales over each month of the fiscal year. The Company accrues commissions and incentives when earned by associates and pays commissions on product and pack sales on a monthly cycle. Comprehensive Income and Accumulated Other Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s comprehensive income consists of the Company’s net income, foreign currency translation adjustments from its Japan, Republic of Korea, Taiwan, Denmark, Norway, Sweden, Mexico and China operations, remeasurement of intercompany balances classified as equity in its Korea, and Mexico operations, and changes in the pension obligation for its Japanese employees. Recently Adopted Accounting Pronouncements The Company adopted ASU 2016-13 as of January 1, 2023. This new standard adds to U.S. GAAP an impairment model (known as the current expected credit loss ("CECL") model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. ASU 2016-13 only applies to our receivables from revenue transactions. Under ASC 606, revenue is recognized when, among other criteria, it is probable that the entity will collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life are required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. The Company adopted the accounting standard using the prospective transition approach as of January 1, 2023. The cumulative effect upon adoption did not have a material impact on our consolidated financial statements or existing internal controls. 13 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: INVENTORIES Inventories consist of raw materials, finished goods, and promotional materials. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories as of September 30, 2023 and December 31, 2022, consisted of the following (in thousands) : September 30, 2023 December 31, 2022 Raw materials $ 4,574 $ 3,302 Finished goods 11,144 11,841 Inventory reserves for obsolescence ( 386 ) ( 417 ) Total $ 15,332 $ 14,726 NOTE 3: INCOME TAXES For the three and nine months ended September 30, 2023, the Company’s effective tax rate was 43 % and 166.1 %, respectively. For the three and nine months ended September 30, 2022, the Company's effective tax rate was 28.4 % and 22.0 %, respectively. For the three and nine months ended September 30, 2023 and 2022, the Company's effective tax rate was determined based on the estimated annual effective income tax rate. The effective tax rate for the three and nine months ended September 30, 2023 was different from the federal statutory rate due to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions. The effective tax rate for the three and nine months ended September 30, 2022 was different from the federal statutory rate due to the effect of changes in valuation allowances recorded in certain jurisdictions and the foreign derived intangible deduction in the US. NOTE 4: EARNINGS PER SHARE The Company calculates basic Earnings per Share ("EPS") by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS also reflects the potential dilution that could occur if common stock were issued for awards outstanding under the Mannatech, Incorporated 2017 Stock Incentive Plan (described below). In determining the potential dilutive effect of outstanding stock options f or the three and nine months ended September 30, 2023, the Company used the quarterly and nine-month average common stock close price of $ 11.90 and $ 14.11 , respectively. For the three months ended September 30, 2023, there were 1.86 million weighted-average common shares outstanding used for the basic EPS calculation. For the three months ended September 30, 2023, approximately 0.2 million shares were excluded from the diluted EPS calculation as their effect would have been antidilutive. The Company reported a net loss for the nine months ended September 30, 2023. In determining the potential dilutive effect of outstanding stock options for the three and nine months ended September 30, 2022, the Company used the quarterly and nine-month average common stock close price of $ 20.10 and $ 27.58 per share, respectively. For the three and nine months ended September 30, 2022, there were 1.91 million and 1.93 million weighted-average common shares outstanding used for the basic EPS calculation, respectively. For the three and nine months ended September 30, 2022, approximately 0.04 million and 0.09 million shares, respectively, subject to options were included in the calculation resulting in 1.95 million and 2.02 million dilutive shares, respectively, used to calculate diluted EPS. For the three months ended September 30, 2022, less than 0.1 million shares were excluded from the diluted EPS calculation, as the effect would have been antidilutive. For the nine months ended September 30, 2022, approximately 0.1 million shares were excluded from the diluted EPS calculation, as the effect would have been antidilutive. 14 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: STOCK-BASED COMPENSATION The Company currently has one active stock-based compensation plan, the Mannatech, Incorporated 2017 Stock Incentive Plan, which was adopted by the Company’s Board of Directors (the "Board") on April 17, 2017 and was approved by its shareholders on June 8, 2017, and subsequently amended by the Board at its February 2019 special meeting, which amendment was approved by the Company's shareholders on June 11, 2019 (as amended, the "2017 Plan"). The 2017 Plan supersedes the Mannatech, Incorporated 2008 Stock Incentive Plan (as amended, the "2008 Plan"), which was set to expire on February 20, 2018. The Board has reserved a maximum of 370,000 shares of our common stock that may be issued under the 2017 Plan (subject to adjustments for stock splits, stock dividends or other changes in corporate capitalization). As of September 30, 2023, the Company had a total of 108,468 shares available for grant under the 2017 Plan, which expires on April 16, 2027. The 2017 Plan provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock and performance stock units to our employees, board members, and consultants. However, only employees of the Company and its corporate subsidiaries are eligible to receive incentive stock options. The exercise price per share for all stock options will be no less than the market value of a share of common stock on the date of grant. Any incentive stock option granted to an employee owning more than 10 % of our common stock will have an exercise price of no less than 110 % of our common stock’s market value on the grant date. The majority of stock options vest over two or three years, and generally are granted with a term of ten years, or five years in the case of an incentive option granted to an employee who owns more than 10 % of our common stock. The Company records stock-based compensation expense related to granting stock options in selling and administrative expenses. During the nine months ended September 30, 2023 and 2022, the Company granted 5,000 and 11,807 stock options, respectively. The fair value of stock options granted during the nine months ended September 30, 2023 and 2022 was approximately $ 4.32 and $ 7.21 per share, respectively. The Company recognized compensation expense as follows for the three and nine months ended September 30 (in thousands) : Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Total gross compensation expense $ 8 $ 11 $ 36 $ 66 Total tax benefit associated with compensation expense 2 2 8 15 Total net compensation expense $ 6 $ 9 $ 28 $ 51 As of September 30, 2023, the Company expects to record compensation expense in the future as follows (in thousands) : Three months ending December 31, 2023 Years ending December 31, 2024 2025 Total gross unrecognized compensation expense $ 8 $ 17 $ 3 Tax benefit associated with unrecognized compensation expense 2 4 1 Total net unrecognized compensation expense $ 6 $ 13 $ 2 15 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: SHAREHOLDERS’ EQUITY Treasury Stock During the three months ended September 30, 2023 and 2022, the Company repurchased 6,058 and 46,332 shares of its outstanding common stock, respectively. During the nine months ended September 30, 2023 and 2022, the Company repurchased 13,454 and 77,743 shares of its outstanding common stock, respectively. As of September 30, 2023 , the Company had 1,860,154 s hares of common stock outstanding. As of September 30, 2022, the Company had 1,874,930 shares of common stock outstanding. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss, reflected in the Consolidated Statement of Shareholders’ Equity, represents net income plus the results of certain shareholders’ equity changes not reflected in the Consolidated Statements of Operations, such as foreign currency translation and certain pension and post-retirement benefit obligations. The after-tax components of accumulated other comprehensive loss are as follows (in thousands) : Foreign Currency Translation Pension Postretirement Benefit Obligation Accumulated Other Comprehensive Income (Loss), Net Balance as of December 31, 2022 $ ( 608 ) $ 400 $ ( 208 ) Current-period change (1) ( 2,339 ) — ( 2,339 ) Balance as of September 30, 2023 $ ( 2,947 ) $ 400 $ ( 2,547 ) (1) No material amounts reclassified from accumulated other comprehensive loss. Dividends On March 5, 2023, the Board declared a dividend of $ 0.20 per share that was paid on March 30, 2023 to shareholders of record on March 16, 2023, for an aggregate amount of $ 0.4 million. On May 25, 2023, the Board declared a dividend of $ 0.20 per share that was paid on June 29, 2023 to shareholders of record on June 15, 2023, for an aggregate amount of $ 0.4 million. NOTE 7: LITIGATION Litigation in General The Company has incurred several claims in the normal course of business. The Company believes such claims can be resolved without any material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company maintains certain liability insurance; however, certain costs of defending lawsuits are not covered by or only partially covered by its insurance policies, including claims that are below insurance deductibles. Additionally, insurance carriers could refuse to cover certain claims, in whole or in part. The Company accrues costs to defend itself from litigation as they are incurred. The outcome of litigation is uncertain, and despite management’s views of the merits of any litigation, or the reasonableness of the Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for the contingencies arising from current legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated. No legal reserve was deemed necessary at September 30, 2023. 16 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: LEASES The Company has entered into contractual lease arrangements to rent office space and equipment from third-party lessors. See Note 5 to the consolidated financial statements in our 2022 Annual Report. On March 10, 2023, the Company entered into a five-year agreement to sublease 10,000 rentable square feet of the Company's leased office space in Flower Mound, Texas to a subtenant. There was no modification or impairment by entering into the sublease agreement because the Company was not released from its obligations under the head lease. As of September 30, 2023, the Company had earned less than $0.1 million income from the sublease, which is presented as a component of net sales on the Company's Consolidated Statements of Operations. As of September 30, 2023, the Company had net operating lease right-of-use assets of $ 3.7 million and net finance lease right-of-use assets of $ 1.3 million. At September 30, 2023, our operating lease liabilities were $ 4.7 million and our finance lease liabilities were $ 1.3 million. The weighted-average remaining lease term and discount rate related to the Company’s operating lease liabilities as of September 30, 2023 were 3.50 years and 4.6 %, respectively. The weighted-average remaining lease term and discount rate related to the Company’s finance lease liabilities as of September 30, 2023 were 4.42 years and 6.5 %, respectively. The Company uses the discount rates implicit in each lease, or an estimate of the Company's incremental borrowing rate if the rate implicit in a lease cannot be readily determined. As of September 30, 2023 and December 31, 2022 our right-of-use assets and lease liabilities consisted of the following (in thousands): Leases Classification September 30, 2023 December 31, 2022 Right-of-use assets Operating leases Other assets $ 3,674 $ 4,649 Finance leases Property and equipment, net 1,311 182 Total right-of-use assets $ 4,985 $ 4,831 Current portion of lease liabilities Operating leases Accrued expenses $ 1,698 $ 1,600 Finance leases Current portion of finance leases 272 61 Long-term portion of lease liabilities Operating leases Other long-term liabilities 2,970 4,153 Finance leases Finance leases, excluding current portion 1,022 88 Total lease liabilities $ 5,962 $ 5,902 As of September 30, 2023, the Company's future sublease income and minimum future lease payments on operating and finance leases were as follows (in thousands): September 30, 2023 Future Maturities of Leases Operating Leases Finance Leases Sublease Income Remaining 2023 524 89 ( 33 ) 2024 1,795 337 ( 132 ) 2025 1,115 327 ( 132 ) 2026 719 327 ( 132 ) Thereafter 917 405 ( 187 ) Total minimum lease payments $ 5,070 $ 1,485 $ ( 616 ) Imputed interest ( 402 ) ( 191 ) — Present value of minimum lease payments $ 4,668 $ 1,294 $ ( 616 ) 17 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: FAIR VALUE The Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures. Fair Value Measurements and Disclosure (Topic 820) of the Financial Accounting Standards Board (“FASB”) establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories: • Level 1 – Quoted unadjusted prices for identical instruments in active markets. • Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets. • Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company. The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. The investment instruments held by the Company are money market funds and interest-bearing deposits for which quoted market prices are readily available. The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company does not have any material financial liabilities that were required to be measured at fair value on a recurring basis at September 30, 2023. The table below presents the recorded amount of financial assets measured at fair value (in thousands) on a recurring basis as of September 30, 2023 and December 31, 2022. September 30, 2023 Level 1 Level 2 Level 3 Total Assets Money Market Funds – JPMorgan Chase, US $ 1,701 $ — $ — $ 1,701 Interest bearing deposits – various banks $ 1,198 — — $ 1,198 Total assets $ 2,899 $ — $ — $ 2,899 Amounts included in: Cash and cash equivalents $ 1,701 $ — $ — $ 1,701 Restricted cash 674 — — 674 Long-term restricted cash 524 — — 524 Total $ 2,899 $ — $ — $ 2,899 December 31, 2022 Level 1 Level 2 Level 3 Total Assets Interest bearing deposits – various banks $ 3,855 — — $ 3,855 Total assets $ 3,855 $ — $ — $ 3,855 Amounts included in: Cash and cash equivalents $ 3,014 $ — $ — $ 3,014 Restricted cash 680 — — 680 Long-term restricted cash 161 — — 161 Total $ 3,855 $ — $ — $ 3,855 18 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: SEGMENT INFORMATION The Company's sole reporting segment is one where we sell proprietary nutritional supplements, skin care and anti-aging products, and weight-management and fitness products through network marketing distribution channels operating in twenty-four countries. Each of the business units receives associate fees or sells similar packs (in the case of Mexico and South Korea, where packs have not been replaced with associate fees, see Note 1, Organization and Summary of Significant Accounting Policies ) and possesses similar economic characteristics, such as selling prices and gross margins. In each country, the Company markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financial information by country and focuses its internal reporting and analysis of revenues by pack sales, associate fees and product sales. The Company sells its products through its independent associates who occupy positions in our network and distribute products through similar distribution channels in each country. No single independent associate has ever accounted for more than 10 % of the Company’s consolidated net sales. The Company also operates a non-direct selling business in mainland China. Our subsidiary in China, Meitai, is 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. The Company has operations in twelve countries and sells product in twenty-five countries around the world. These operations are located in the United States, Canada, Australia, the Netherlands, the United Kingdom, Japan, the Republic of Korea (South Korea), Taiwan, South Africa, Mexico, Hong Kong and China. We currently sell our products in three regions: (i) the Americas (the United States, Canada and Mexico); (ii) 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. Consolidated net sales shipped to customers in these regions, along with pack or associate fee and product information for the three and nine months ended September 30, were as follows (in millions, except percentages) : Three Months Ended September 30, Nine Months Ended September 30, Region 2023 2022 2023 2022 Americas $ 10.7 32.8 % $ 11.1 31.3 % $ 31.8 32.0 % $ 30.6 29.8 % Asia/Pacific 19.6 60.1 % 21.4 60.2 % 60.0 60.4 % 63.2 61.4 % EMEA 2.3 7.1 % 3.0 8.5 % 7.5 7.6 % 9.1 8.8 % Totals $ 32.6 100.0 % $ 35.5 100.0 % $ 99.3 100.0 % $ 102.9 100.0 % Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Consolidated product sales $ 31.0 $ 33.6 $ 93.9 $ 97.5 Consolidated pack sales and associate fees 1.2 1.7 4.7 4.8 Consolidated other 0.4 0.2 0.7 0.6 Consolidated total net sales $ 32.6 $ 35.5 $ 99.3 $ 102.9 19 MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Long-lived assets, which include property and equipment and construction in process for the Company and its subsidiaries, as of September 30, 2023 and December 31, 2022, reside in the following regions, as follows (in millions) : Region September 30, 2023 December 31, 2022 Americas $ 3.9 $ 3.2 Asia/Pacific 0.4 0.6 EMEA — — Total $ 4.3 $ 3.8 Inventory balances, which consist of raw materials, finished goods, and promotional materials, as offset by the allowance for slow moving or obsolete inventories, reside in the following regions (in millions) : Region September 30, 2023 December 31, 2022 Americas $ 8.1 $ 7.5 Asia/Pacific 5.5 5.4 EMEA 1.7 1.8 Total $ 15.3 $ 14.7 20 Table of Contents