MANNATECH INC 10-Q

Item 2. 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 results of operations for the three and nine months ended September 30, 2023 as compared to the same period in 2022, and should be read in conjunction with Item 1 “Financial Statements” in Part I of this quarterly report on Form 10-Q and Item 1A “Risk Factors” in Part I of our 2022 Annual 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. To supplement our financial results presented in accordance with GAAP, we disclose certain adjusted financial measures which we refer to as Constant dollar (“Constant dollar”) measures, which are non-GAAP financial measures. Refer to the Non-GAAP Financial Measures section herein for a description of how such Constant dollar measures are determined. COMPANY OVERVIEW The Company 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, topical and skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China). We also ship our products to customers in the following countries: Belgium, France, Greece, Italy, Luxembourg, and Poland. We conduct our business as a single operating segment and primarily sell our products through a network of approximately 146,000 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 operate as a seller of nutritional supplements, topical and skin care and anti-aging products, and weight-management products through our network marketing distribution channels operating in twenty-four countries and direct e-commerce retail in China. 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 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. The Company maintains a corporate website at www.mannatech.com. Current Economic Conditions and Recent Developments Overall net sales decreased $2.9 million, or 8.3%, to $32.6 million, during the three months ended September 30, 2023, as compared to the same period in 2022. Net sales for the nine months ended September 30, 2023 decreased by $3.6 million, or 3.5%, to $99.3 million, as compared to the same period in 2022. For the three and nine months ended September 30, 2023, our net sales decreased 8.5% and 1.2%, respectively, on a Constant dollar basis (see Non-GAAP Measures, below); foreign exchange during the three months ended September 30, 2023 increased GAAP net sales by $0.1 million, as compared to the same period in 2022. Foreign exchange for the nine months ended September 30, 2023 decreased GAAP net sales by $2.4 million, as compared to the same period in 2022. For the three and nine months ended September 30, 2023, our operations outside of the Americas accounted for approximately 67.2% and 68.0%, respectively, of our consolidated net sales. 21 Table of Contents RESULTS OF OPERATIONS Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended September 30, 2023 and 2022 (in thousands, except percentages): 2023 2022 Change from 2022 to 2023 Total dollars % of net sales Total dollars % of net sales Dollar Percentage Net sales $ 32,553 100.0 % $ 35,513 100.0 % $ (2,960) (8.3) % Cost of sales 6,625 20.4 % 7,416 20.9 % (791) (10.7) % Gross profit 25,928 79.6 % 28,097 79.1 % (2,169) (7.7) % Operating expenses: Commissions and incentives 13,178 40.5 % 14,242 40.1 % (1,064) (7.5) % Selling and administrative expenses 6,946 21.3 % 6,656 18.7 % 290 4.4 % Depreciation and amortization expense 450 1.4 % 716 2.0 % (266) (37.2) % Other operating costs 5,182 15.9 % 5,126 14.4 % 56 1.1 % Total operating expenses 25,756 79.1 % 26,740 75.3 % (984) (3.7) % Income from operations 172 0.5 % 1,357 3.8 % (1,185) (87.3) % Interest (expense) income (17) (0.1) % 19 0.1 % (36) (189.5) % Other income, net 320 1.0 % 287 0.8 % 33 11.5 % Income before income taxes 475 1.5 % 1,663 4.7 % (1,188) (71.4) % Income tax provision (457) (1.4) % (472) (1.3) % 15 (3.2) % Net income $ 18 0.1 % $ 1,191 3.4 % $ (1,173) (98.5) % Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2023 and 2022 (in thousands, except percentages): 2023 2022 Change from 2022 to 2023 Total dollars % of net sales Total dollars % of net sales Dollar Percentage Net sales $ 99,261 100.0 % $ 102,873 100.0 % $ (3,612) (3.5) % Cost of sales 21,042 21.2 % 22,427 21.8 % (1,385) (6.2) % Gross profit 78,219 78.8 % 80,446 78.2 % (2,227) (2.8) % Operating expenses: Commissions and incentives 40,200 40.5 % 41,487 40.3 % (1,287) (3.1) % Selling and administrative expenses 20,619 20.8 % 20,479 19.9 % 140 0.7 % Depreciation and amortization expense 1,224 1.2 % 1,349 1.3 % (125) (9.3) % Other operating costs 16,245 16.4 % 14,886 14.5 % 1,359 9.1 % Total operating expenses 78,288 78.9 % 78,201 76.0 % 87 0.1 % (Loss) income from operations (69) (0.1) % 2,245 2.2 % (2,314) (103.1) % Interest (expense) income (3) — % 57 0.1 % (60) (105.3) % Other income, net 803 0.8 % 288 0.3 % 515 178.8 % Income before income taxes 731 0.7 % 2,590 2.5 % (1,859) (71.8) % Income tax provision (1,214) (1.2) % (571) (0.6) % (643) 112.6 % Net (loss) income $ (483) (0.5) % $ 2,019 2.0 % $ (2,502) (123.9) % 22 Table of Contents Non-GAAP Financial Measures To supplement our financial results presented in accordance with GAAP, we disclose 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 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. To exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, we calculate current year results and prior year results at a constant exchange rate, which is the prior year’s rate. Currency impact is determined as the difference between actual growth rates and constant currency growth rates. Three-month period ended September 30, 2023 September 30, 2022 Constant $ Change (in millions, except percentages) GAAP Measure: Total $ Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Net sales $ 32.6 $ 32.5 $ 35.5 $ (3.0) (8.5) % Product 31.0 30.9 33.6 (2.7) (8.0) % Pack sales and associate fees 1.2 1.2 1.7 (0.5) (29.4) % Other 0.4 0.4 0.2 0.2 100.0 % Gross profit 25.9 25.8 28.1 (2.3) (8.2) % (Loss) income from operations 0.2 0.2 1.4 (1.2) (85.7) % Nine-month period ended September 30, 2023 September 30, 2022 Constant $ Change (in millions, except percentages) GAAP Measure: Total $ Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Net sales $ 99.3 $ 101.7 $ 102.9 $ (1.2) (1.2) % Product 93.9 96.2 97.5 (1.3) (1.3) % Pack sales and associate fees 4.7 4.8 4.8 — — % Other 0.7 0.7 0.6 0.1 16.7 % Gross profit 78.2 80.1 80.4 (0.3) (0.4) % (Loss) income from operations (0.1) 0.5 2.2 (1.7) (77.3) % Net Sales Consolidated net sales for the three months ended September 30, 2023 decreased by $2.9 million, or 8.3%, to $32.6 million, as compared to $35.5 million for the same period in 2022. Consolidated net sales for the nine months ended September 30, 2023, decreased by $3.6 million, or 3.5%, to $99.3 million as compared to $102.9 million for the same period in 2022. Net Sales in Dollars and as a Percentage of Consolidated Net Sales Consolidated net sales by region for the three months ended September 30, 2023 and 2022 were as follows (in millions, except percentages) : Region Three Months Ended September 30, 2023 Three Months Ended September 30, 2022 Americas $ 10.7 32.8 % $ 11.1 31.3 % Asia/Pacific 19.6 60.1 % 21.4 60.2 % EMEA 2.3 7.1 % 3.0 8.5 % Total $ 32.6 100.0 % $ 35.5 100.0 % Consolidated net sales by region for the nine months ended September 30, 2023 and 2022 were as follows (in millions, except percentages) : 23 Table of Contents Region Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022 Americas $ 31.8 32.0 % $ 30.6 29.8 % Asia/Pacific 60.0 60.4 % 63.2 61.4 % EMEA 7.5 7.6 % 9.1 8.8 % Total $ 99.3 100.0 % $ 102.9 100.0 % For the three months ended September 30, 2023, net sales in the Americas decreased by $0.4 million, or 3.6%, to $10.7 million, as compared to $11.1 million for the same period in 2022. Our number of active independent associates and preferred customers decreased by 5.3%, which was partially offset by a 1.8% increase in revenue per active independent associate and preferred customer. Foreign currency had the effect of increasing revenue by $0.1 million for the three months ended September 30, 2023, as compared to the same period in 2022. The currency impact is due to the strengthening of the Mexican Peso. For the nine months ended September 30, 2023, net sales in the Americas increased by $1.2 million, or 3.9%, to $31.8 million, as compared to $30.6 million for the same period in 2022. Our revenue per active independent associate and preferred customer increased 9.7%, which was partially offset by a 9.3% decline in the number of active independent associates and preferred customers. Foreign currency had the effect of increasing revenue by $0.4 million for the nine months ended September 30, 2023, as compared to the same period in 2022. The currency impact is due to the strengthening of the Mexican Peso. For the three months ended September 30, 2023, our operations outside of the Americas accounted for approximately 67.2% of our consolidated net sales, whereas in the same period in 2022, our operations outside of the Americas accounted for approximately 68.7% of our consolidated net sales. For the nine months ended September 30, 2023, our operations outside of the Americas accounted for approximately 68.0% of our consolidated net sales, whereas in the same period in 2022, our operations outside of the Americas accounted for approximately 70.3% of our consolidated net sales. For the three months ended September 30, 2023, Asia/Pacific net sales decreased by $1.8 million, or 8.4%, to $19.6 million, as compared to $21.4 million for the same period in 2022 . Revenue per active independent associate and preferred customer decreased 13.5%, which was partially offset by a 5.9% increase in the number of active independent associates and preferred customers. Foreign currency exchange had the effect of increasing revenue by $0.1 million for the three months ended September 30, 2023, as compared to the same period in 2022. The currency impact is primarily due to the strengthening of the Korean Won. For the nine months ended September 30, 2023, Asia/Pacific net sales decreased by $3.2 million, or 5.1%, to $60.0 million, as compared to $63.2 million for the same period in 2022. Revenue per active independent associate and preferred customer decreased 10.3% and the number of active independent associates and preferred customers declined 0.7% . Foreign currency exchange had the effect o f decreasing revenue by $2.0 million f or the nine months ended September 30, 2023, as compared to the same period in 2022. The currency impact is primarily due to the weakening of the Korean Won, Japanese Yen, and Australian Dollar. For the three months ended September 30, 2023, EMEA net sales decreased by $0.7 million, or 23.3%, to $2.3 million, as compared to $3.0 million for the same period in 2022. The decrease was primarily due to a 16.6% decrease in the number of active independent associates and preferred customers and an 8.1% decrease in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of decreasing revenue by $0.1 million f or the three months ended September 30, 2023 as compared to the same period in 2022. The currency impact is primarily due to the weakening of the South African Rand. For the nine months ended September 30, 2023, EMEA net sales decreased by $1.6 million, or 17.6%, to $7.5 million, as compared to $9.1 million for the same period in 2022. The decrease was primarily due to a 17.6% decrease in the number of active independent associates and preferred customers and a 1.2% decline in revenue per active independent associate and preferred customer. We believe the war in Ukraine and inflation are impacting our business. Foreign currency exchange had the effect of decreasing revenue by $0.8 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The currency impact is primarily due to the weakening of the South African Rand. 24 Table of Contents Our total sales and sales mix could be influenced by any of the following: • the impact of the COVID-19 pandemic, the availability and effectiveness of vaccines on a widespread basis and the impact of any mutations of the virus; • the current conflict between Russia and Ukraine, which could adversely affect our business in certain regions; • the impact of inflation; • disruptions in the supply chain; • changes in our sales prices; • changes in shipping fees; • changes in consumer demand; • changes in the number of independent associates and preferred customers; • changes in competitors’ products; • changes in economic conditions; • changes in regulations; • announcements of new scientific studies and breakthroughs; • introduction of new products; • discontinuation of existing products; • adverse publicity; • changes in our commissions and incentives programs; • direct competition; and • fluctuations in foreign currency exchange rates. Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages) : Three Months Ended September 30, Change 2023 2022 Dollar Percentage Consolidated product sales $ 31.0 $ 33.6 $ (2.6) (7.7) % Consolidated pack sales and associate fees 1.2 1.7 (0.5) (29.4) % Consolidated other 0.4 0.2 0.2 100.0 % Total consolidated net sales $ 32.6 $ 35.5 $ (2.9) (8.2) % Nine Months Ended September 30, Change 2023 2022 Dollar Percentage Consolidated product sales $ 93.9 $ 97.5 $ (3.6) (3.7) % Consolidated pack sales and associate fees 4.7 4.8 (0.1) (2.1) % Consolidated other 0.7 0.6 0.1 16.7 % Total consolidated net sales $ 99.3 $ 102.9 $ (3.6) (3.5) % 25 Table of Contents Product Sales Our product sales are made to our independent associates and preferred customers at published wholesale prices. Product sales for the three months ended September 30, 2023 decreased by $2.6 million, or 7.7%, as compared to the same period in 2022. The average order value for the three months ended September 30, 2023 was $177, as compared to $171 for the same period in 2022. The number of orders processed during the three months ended September 30, 2023 decreased by 11.9%, to 179,456, as compared to 203,664 for the same period in 2022. Product sales for the nine months ended September 30, 2023 decreased by $3.6 million, or 3.7%, as compared to the same period in 2022. Product sales decreased primarily due to the decrease in the number of orders processed . The number of orders processed during the nine months ended September 30, 2023 decreased by 7.9%, to 541,574, as compared to 587,919 for the same period in 2022. The average order value for the nine months ended September 30, 2023 was $178, as compared to $175 for the same period in 2022. 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, benefits 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. In certain of these markets, pack sales are completed during the final stages of the registration process and 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. The dollar amount of pack sales and associate fees associated with new and continuing independent associate positions held by individuals in our network was as follows for the three and nine months ended September 30 (in millions, except percentages) : Three Months Ended September 30, Change 2023 2022 Dollar Percentage New $ 0.1 $ 0.1 $ — — % Continuing 1.1 1.6 (0.5) (31.3) % Total $ 1.2 $ 1.7 $ (0.5) (29.4) % Nine Months Ended September 30, Change 2023 2022 Dollar Percentage New $ 0.3 $ 0.3 $ — — % Continuing 4.4 4.5 (0.1) (2.2) % Total $ 4.7 $ 4.8 $ (0.1) (2.1) % Total pack sales and associate fees for the three months ended September 30, 2023 decreased by $0.5 million, or 29.4%, to $1.2 million, as compared to $1.7 million for the same period in 2022. The total number of packs and associate fees sold decreased by 163, or 0.7%, to 23,442 for the three months ended September 30, 2023, as compared to the same period in 2022. Total pack sales and associate fees for the nine months ended September 30, 2023 decreased by $0.1 million, or 2.1%, to $4.7 million, as compared to $4.8 million for the same period in 2022. The total number of packs and associate fees sold decreased by 2,420, or 3.4% to 68,183 for the nine months ended September 30, 2023 as compared to the same period in 2022. 26 Table of Contents Pack sales and associate fees correlate to new associate positions held by individuals in our network when a starter pack or associate fee is purchased and to continuing associate positions held by individuals in our network when an upgrade pack or renewal associate fee is purchased. However, there is no direct correlation between product sales and the number of new and continuing associate positions and preferred customer positions held by individuals in our network because associates and preferred customers utilize products at different volumes. During 2022 and continuing into 2023, we took the following actions to recruit and retain associates and preferred customers: • registered our most popular products with the appropriate regulatory agencies in all countries of operations; • rolled out new products; • continued an aggressive marketing and educational campaign; • continued to strengthen compliance initiatives; • concentrated on publishing results of research studies and clinical trials related to our products; • initiated additional incentives; • continued to explore new advertising and educational tools to broaden name recognition; and • implemented changes to our global associate career and compensation plan. The approximate number of new and continuing active independent associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended September 30, 2023 and 2022 were as follows: 2023 2022 New 78,000 53.4 % 81,000 53.3 % Continuing 68,000 46.6 % 71,000 46.7 % Total 146,000 100.0 % 152,000 100.0 % Recruitment of new independent associates and preferred customers increased by 20.9% to 23,296 in the third quarter of 2023 from 19,273 in the third quarter of 2022. 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 support our independent associates, which in turn helps stimulate product sales. For the three months ended September 30, 2023 and 2022, other sales were $0.4 million and $0.2 million, respectively. For the nine months ended September 30, 2023 and 2022, other sales were $0.7 million and $0.6 million, respectively. Gross Profit For the three months ended September 30, 2023, gross profit decreased by $2.2 million, or 7.7%, to $25.9 million, as compared to $28.1 million for the same period in 2022. For the three months ended September 30, 2023, gross profit as a percentage of net sales increased to 79.6%, as compared to 79.1% for the same period in 2022 due to price increases in certain markets . For the nine months ended September 30, 2023, gross profit decreased by $2.2 million or 2.8% to $78.2 million, as compared to $80.4 million for the same period in 2022. For the nine months ended September 30, 2023, gross profit as a percentage of net sales increased to 78.8%, as compared to 78.2% for the same period in 2022 due to price increases in certain markets . 27 Table of Contents Commissions and Incentives Commission expense for the three months ended September 30, 2023 decreased by 7.9%, or $1.1 million, to $12.4 million, as compared to $13.5 million for the same period in 2022. For the three months ended September 30, 2023, commissions as a percentage of net sales increased to 38.2% from 38.1% for the same period in 2022. Commission expense for the nine months ended September 30, 2023 decreased by 2.5%, or $1.0 million, to $38.0 million, as compared to $39.0 million for the same period in 2022. For the nine months ended September 30, 2023, commissions as a percentage of net sales increased to 38.3% from 37.9% for the same period in 2022. Incentive costs for the three months ended September 30, 2023 and 2022 remained constant at $0.7 million. For the three months ended September 30, 2023, incentives as a percentage of net sales increased to 2.2% from 2.0% for the same period in 2022. Incentive costs for the nine months ended September 30, 2023 decreased to $2.2 million, as compared to $2.5 million for the same period in 2022. For the nine months ended September 30, 2023, incentives as a percentage of net sales decreased to 2.2% from 2.4% for the same period in 2022. Selling and Administrative Expenses Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses, such as the costs related to hosting our corporate-sponsored events. For the three months ended September 30, 2023, selling and administrative expenses increased by $0.2 million, or 4.4%, to $6.9 million, as compared to $6.7 million for the same period in 2022 . The increase in selling and administrative expenses consisted of a $0.2 million increase in marketing costs and a $0.1 million increase in warehouse costs, which was partially offset by a $0.1 million decrease in payroll costs. Selling and administrative expenses, as a percentage of net sales, for the three months ended September 30, 2023 increased to 21.3% from 18.7% for the same period in 2022. For the nine months ended September 30, 2023, selling and administrative expenses increased by $0.1 million, or 0.7%, to $20.6 million, as compared to $20.5 million for the same period in 2022 . The increase in selling and administrative expenses consisted of a $0.3 million increase in marketing costs and a $0.2 million increase in warehouse costs, which was partially offset by a $0.4 million decrease in payroll costs (lower payroll costs were partially offset by $0.7 mi llion severance). Selling and administrative expenses, as a percentage of net sales, for the nine months ended September 30, 2023 increased to 20.8% from 19.9% for the same period in 2022. Other Operating Costs Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt and other miscellaneous operating expenses. For the three months ended September 30, 2023, other operating costs increased by $0.1 million, or 1.1%, to $5.2 million, as compared to $5.1 million for the same period in 2022. For the three months ended September 30, 2023, other operating costs as a percentage of net sales increased to 15.9% from 14.4% for the same period in 2022. The increase in operating costs was primarily due to a $0.3 million increase in bad debt, a $0.2 million increase in consulting fees for Trulu, a new venture to serve as our innovation hub, which was partially offset by a $0.2 million decrease in travel and entertainment, a $0.1 million decrease in office expenses and a $0.1 million decrease in credit card fees. For the nine months ended September 30, 2023, other operating costs increased by $1.4 million, or 9.1%, to $16.2 million, as compared to $14.9 million for the same period in 2022. For the nine months ended September 30, 2023, other operating costs as a percentage of net sales increased to 16.4% from 14.5% for the same period in 2022. The increase in operating costs was primarily due to a $1.2 million increase in consulting fees, a $0.5 million increase in bad debt and a $0.3 million increase in travel and entertainment, which was partially offset by a $0.3 million decrease in office expenses and a $0.3 million decrease in credit card fees. Consulting fees include $0.7 million in consulting relating to Trulu, a new venture to serve as our innovation hub. 28 Table of Contents Depreciation and Amortization Expense Depreciation and amortization expense was $0.5 million and $0.7 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense was $1.2 million and $1.3 million for the nine months ended September 30, 2023 and 2022, respectively. Other Income (Expense), Net Due to foreign exchange gains and losses , other income was $0.3 million for each of the three months ended September 30, 2023 and 2022 . Due to foreign exchange gains and losses, other income was $0.8 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2022, other income was $0.3 million. Income Tax (Provision) Benefit (Provision) benefit for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates for key jurisdictions are as follows, for the three and nine months ended September 30: Country 2023 2022 China (1) 25.0 % 2.5 % Hong Kong 16.5 % 16.5 % Japan 34.6 % 34.6 % Republic of Korea 20.9 % 22.0 % United States (2) 22.2 % 22.2 % (1) For 2022, the Company qualified for a reduced tax rate of 2.5% in China as a Small Low Profit Enterprise. (2) Includes blended state effective rate of 1.2% for 2023 and 2022 in addition to U.S. federal statutory rate of 21%. Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States. We use the recognition and measurement provisions of the FASB ASC Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction. The provision for income taxes is directly related to our profitability and changes in the taxable income among countries of operation. For the three and nine months ended September 30, 2023, the Company’s effective tax rate was 43.0% 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. The effective tax rates for the three and nine months ended September 30, 2023 was different from the federal statutory rate due primarily to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions. The effective tax rates for the three and nine months ended September 30, 2022 was different from the federal statutory rate due primarily to the effect of changes in valuation allowances recorded in certain jurisdictions and the foreign derived intangible deduction in the US. 29 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and Cash Equivalents As of September 30, 2023, our cash and cash equivalents decreased by 42.5%, or $5.8 million, to $7.9 million from $13.8 million as of December 31, 2022. The Company is required to restrict cash for: (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) the Australia building lease collateral. The current portion of restricted cash balances was $0.9 million at each of September 30, 2023 and December 31, 2022. The long-term portion of restricted cash balances was $0.8 million and $0.5 million at September 30, 2023 and December 31, 2022, respectively. Finally, fluctuations in currency rates produced a decrease of $2.3 million and $5.4 million in cash and cash equivalents for the nine months ended September 30, 2023 and 2022, respectively. Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends. We did not pay a dividend in the current quarter in order to preserve approximately $0.4 million cash. Business objectives, operations, and expansion of operations are funded 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 September 30, 2023 and December 31, 2022, our working capital was $2.3 million and $5.1 million , respectively. Net Cash Flows Our net consolidated cash flows consisted of the following, for the nine months ended September 30 (in millions) : Provided by (Used in): 2023 2022 Operating activities $ (1.0) $ 0.5 Investing activities $ (0.5) $ (0.9) Financing activities $ (1.6) $ (3.3) Operating Activities Operating activities used $1.0 million cash for the nine months ending September 30, 2023. This decrease in cash was the result of an operating loss, tax payments, and our expenditures for inventory. Operating activities provided $0.5 million cash flow during the nine months ending September 30, 2022, and our primary source of cash was the $2.2 million income from operations. We invested the cash generated from our profits in inventory and to pay accrued liabilities and accounts payable. Investing Activities For the nine months ended September 30, 2023 and 2022, we invested cash of $0.5 million and $0.9 million, respectively. During the nine months ended September 30, 2023, we invested approximately $0.5 million in back-office software projects and equipment, reported as property and equipment. During the nine months ended September 30, 2022, we invested approximately $0.9 million in back-office software projects and equipment reported as property and equipment . Financing Activities For the nine months ended September 30, 2023 and 2022, our financing activities used cash of $1.6 million and $3.3 million, respectively. For the nine months ended September 30, 2023, we used $0.7 million in payments of dividends to shareholders, $0.7 million in the repayment of finance lease obligations and $0.2 million in the repurchase of common stock. For the nine months ended September 30, 2022, we used $1.2 million in payments of dividends to shareholders, $1.6 million in the repurchase of our company common stock and $0.6 million in the repayment of finance lease obligations. 30 Table of Contents General Liquidity and Cash Flows Short Term Liquidity 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. As our primary source of liquidity is our cash flow from operations, this will be dependent on our ability to maintain and increase revenue and/or continue to reduce operational expenses. We have suspended the payment of quarterly dividends in the immediate future. However, 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 engaged in ongoing audits in various tax jurisdictions and other disputes in the normal course of business. It is impossible at this time to predict whether we will incur any liability, or to estimate the ranges of damages, if any, in connection with these matters. Adverse outcomes on these uncertainties may lead to substantial liability or enforcement actions that could adversely affect our cash position. For more information, see Note 3, Income Taxes, and Note 7, Litigation, to our consolidated financial statements. We have contractual purchase commitments with certain raw materials suppliers to purchase minimum quantities and to ensure exclusivity of our raw materials and the proprietary nature of our products. At September 30, 2023, we have one supply agreement that requires the Company to purchase an aggregate of $1.9 million through 2023 and $2.6 million annually through 2024, with no purchase commitments thereafter. We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and he lp ensure quality control standards. These agreements do not require us to purchase any minimum quantities. We have no present commitments or agreements with respect to acquisitions or purchases of any manufacturing facilities; however, management from time to time explores the possibility of the benefits of purchasing a raw material manufacturing facility to help control the costs of our raw materials and help ensure quality control standards. We have operating lease liabilities for the property and equipment we use in our business operations. These operating lease liabilities represent our minimum future payment obligations on operating leases, including imputed interest. At September 30, 2023, our operating lease liabilities were $4.7 million , of which $1.7 million was recorded in Accrued expenses and $3.0 million was recorded in Other long-term liabilities. We also have finance lease liabilities of $1.3 million a nd lease restoration liabilities o f $0.3 million. We have pension obligations o f $1.2 m illion related to our employee benefit plan at our Japan subsidiary, which is included in Other long-term liabilities. Long Term Liquidity We believe our cash flows from operations should be adequate to fund our normal expected future business operations. As our primary source of liquidity is from our cash flows from operations, this will be dependent on our ability to maintain 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. 31 Table of Contents OFF-BALANCE SHEET ARRANGEMENTS We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP. The application of GAAP requires us to make estimates and assumptions that affect the reported values of assets and liabilities at the date of our financial statements, the reported amounts of revenues and expenses during the reporting period, and the related disclosures of contingent assets and liabilities. 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 significant accounting policies and critical 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 doubtful accounts, inventory reserves, long-lived fixed assets and capitalization of internal-use software development costs, reserve for uncertain income tax positions an d tax valuation allowances, revenue recognition, sales returns, and deferred revenues, accounting for stock-based compensation, and contingencies and litigation. 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 significant accounting policies and critical estimates as of September 30, 2023. Inventory Reserves Inventory consists of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs that approximate average costs) or market. 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. Uncertain Income Tax Positions and Tax Valuation Allowances As of September 30, 2023, there was nothing recorded in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions. As required by Topic 740, we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions. We base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit. We are also subject to periodic audits from multiple domestic and foreign tax authorities related to income tax and other forms of taxation. These audits examine our tax positions, timing of income and deductions, and allocation procedures across multiple jurisdictions. Depending on the nature of the tax issue, we could be subject to audit over several years. There are ongoing income tax audits in various international jurisdictions that we believe are not material to our financial statements. 32 Table of Contents Revenue Recognition and Deferred Commissions Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. We recognize revenue from shipped packs and products upon receipt by the customer. We estimate order delivery dates using weighted averages of historical delivery data periodically provided by our freight carriers. Corporate-sponsored event revenue is recognized when the event is held. Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (1) the sales of the product and (2) the loyalty program. For these contracts, we account 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. We provide associates with access to a complimentary three-month package for the Success Tracker™ and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations: (1) providing new associates with the eligibility to earn commissions, bonuses and incentives for twelve months, (2) three months of complimentary access to utilize the Success Tracker™ online tool, and (3) 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. With regard to both of the aforementioned contracts, we determine the standalone selling prices by using observable inputs, which include our standard published price lists. Product Return Policy We stand behind our packs and 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. All refunds must be 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 then return or exchange the product based on the associate product return policy. • 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 terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% restocking fee. We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies in the United States and Canada, only for the first 180 days following the product’s purchase and applies in other countries where we sell our products for the first 90 days following the product’s purchase; however, any commissions earned by an associate will be deducted from the refund. If we discover abuse of the refund policy, we may terminate the associate’s or preferred customer’s account. Historically, sales returns estimates have not materially deviated from actual sales returns, as the majority of our customers who return merchandise do so within the first 90 days after the original sale. Based upon our return policies and historical experience, we estimate a sales return reserve for expected sales refunds over a rolling six-month period. If actual results differ from our estimated sales returns reserves due to various factors, the amount of revenue recorded each period could be materially affected. Historically, our sales returns have not materially changed through the years and have averaged 1.5% or less of our gross sales. 33 Table of Contents Accounting for Stock-Based Compensation We grant stock options to our employees, board members, and consultants. At the date of grant, we determine the fair value of a stock option award and recognize compensation expense over the requisite service period, or the vesting period of such stock option award, which is two or three years. The fair value of the stock option award is calculated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires us to apply judgment and use highly subjective assumptions, including expected stock option life, expected volatility, expected average risk-free interest rates, and expected forfeiture rates. 2023 Grants Estimated fair value per of options granted: $ 4.32 Assumptions: Annualized dividend yield 6.4 % Risk-free rate of return 4.0 % Common stock price volatility 66.5 % Expected average life of stock options (in years) 4.5 The assumptions we use are based on our best estimates and involve inherent uncertainties related to market conditions that are outside of our control. If actual results are not consistent with the assumptions we use, the stock-based compensation expense reported in our consolidated financial statements may not be representative of the actual economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our estimated forfeitures, we may be required to make an adjustment to our consolidated financial statements in future periods. If we grant additional stock options in the future, we would be required to recognize additional compensation expense over the vesting period of such stock options in our consolidated statement of operations. As of September 30, 2023, we had 108,468 shares available for grant in the future. During the nine months ended September 30, 2023, the Company granted 5,000 stock options. Contingencies and Litigation Each quarter, we evaluate the need to establish a reserve for any legal claims or assessments. We base our evaluation on our best estimates of the potential liability in such matters. The legal reserve includes an estimated amount for any damages and the probability of losing any threatened legal claims or assessments. We consult with our general and outside counsel to determine the legal reserve, which is based upon a combination of litigation and settlement strategies. Although we believe that our legal reserve and accruals are based on reasonable judgments and estimates, actual results could differ, which may expose us to material gains or losses in future periods. If actual results differ, if circumstances change, or if we experience an unanticipated adverse outcome of any legal action, including any claim or assessment, we would be required to recognize the estimated amount, which could reduce net income, earnings per share, and cash flows. 34 Table of Contents