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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-17 · 119 added, 219 removed, 213 unchanged (61% of the section changed)

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The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the two years ended December 31, 2023 and 2022.

This discussion should be read in conjunction with “Item 15.

– Consolidated Financial Statements” beginning on page F-1 of this report and with other financial information included elsewhere in this report.

This discussion should be read in conjunction with “Item 15.1 – Consolidated Financial Statements” beginning on page F-1 of this report and with other financial information included elsewhere in this report.

Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis.

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Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993.

We develop and sell innovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products that target optimal health and wellness.

We develop and sell innovative, high quality, proprietary nutritional supplements, skin care and anti-aging products, and weight-management products that target optimal health and wellness.

We currently sell our products in three regions:

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

We conduct our business as a single reporting segment and primarily sell our products through a network of approximately 145,000 active associates and preferred customer positions held by individuals that purchased our products and/or packs or paid associate fees during the last 12 months, who we refer to as current associates and preferred customers .

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 24 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.

New associate or preferred customer positions are created in our network when our associate fees are paid or products and packs are purchased for the first time under a new account.

We review and analyze net sales by geographical location and by products and packs on a consolidated basis.

Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.

Because we sell our products 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;

Because we sell our products principally through network marketing distribution channels, the opportunities and challenges that affect us most are:

recruitment of new and retention of active associates and preferred customers that occupy sales or purchasing positions in our network;

entry into new markets and growth of existing markets;

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Current Economic Conditions and Recent Developments

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

Consolidated net sales for the year ended December 31, 2023 was $132.0 million, as compared to $137.2 million for the year ended December 31, 2022 .

Net sales decreased $5.2 million, or 3.8%, for 2023, as compared to 2022 .

Our 2023 net sales declined $2.9 million, or 2.1%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.3 million decrease in GAAP net sales as compared to 2022.

We incurred an operating loss of $1.0 million for the year ended December 31, 2023, as compared to $0.4 million for the same period last year.

Our 2023 operating loss, on a Constant dollar basis (see Non-GAAP Financial Measures, below), was $0.4 million.

In June 2023, the Company launched a tiered affiliate program in the United States under the brand name, “Trulu™.” The Trulu brand is operated by our wholly owned subsidiary, “NEMO”, and is separate from our network marketing business.

For the year ended December 31, 2023 , we incurred an operating loss of $1.1 million in connection with the start-up of our NEMO business.

Excluding the startup loss of NEMO from the consolidated operating loss on a Constant dollar basis, we would have generated an operating profit of approximately $0.7 million in 2023, as compared to an operating loss of $0.4 million in 2022 .

RESULTS OF OPERATIONS

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Depreciation and amortization 1,628 1.2 % 1,627 1.2 % 1 0.1 %

Other operating costs 19,973 14.6 % 21,634 13.5 % (1,661) (7.7) %

Total operating expenses 103,829 78.7 % 104,553 76.2 % (724) (0.7) %

(Loss) income from operations (405) (0.3) % 9,049 5.7 % (9,454) (104.5) %

Loss from operations (964) (0.7) % (405) (0.3) % (559) 138.0 %

Interest income 4 — % 88 0.1 % (84) (95.5) %

Other (expense) income, net (162) (0.1) % (223) (0.1) % 61 27.4 %

(Loss) income before income taxes (479) (0.3) % 8,892 5.6 % (9,371) 105.4 %

Income tax (provision) benefit (4,011) (2.9) % 950 0.6 % (4,961) (522.2) %

Net (loss) income $ (4,490) (3.3) % $ 9,842 6.2 % $ (14,332) 145.6 %

Other expense, net (170) (0.2) % (162) (0.1) % (8) 4.9 %

Loss before income taxes (1,130) (0.9) % (479) (0.3) % (651) 135.9 %

Income tax provision (1,109) (0.8) % (4,011) (2.9) % 2,902 (72.4) %

Net loss $ (2,239) (1.7) % $ (4,490) (3.3) % $ 2,251 50.1 %

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S.

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), the table below summarizes operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S.

dollars, including changes in:

Net Sales, Gross Profit, and Income (loss) from Operations.

Net Sales, Gross Profit, and Loss from Operations.

We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures.

We believe these measures provide investors an additional perspective on trends.

We believe these measures provide investors an additional perspective on trends and our operating results.

To exclude the impact of changes due to the translation of foreign currencies into U.S.

dollars, 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.

dollars in the current year, we calculate current year results at a constant exchange rate utilizing the prior year’s rate.

Currency impact is determined as the difference between the actual GAAP results and the recalculated results for the current year at the constant dollar rates (in millions, except percentages).

2023 2022 Constant Dollar Change

Total $ Non-GAAP Measure:

Total $ Translation Adjustment Non-GAAP Measure:

Constant $ GAAP

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Net sales $ 132.0 $ 2.3 $ 134.3 $ 137.2 $ (2.9) (2.1) %

Product $ 130.2 $ 140.0 $ 151.0 $ (11.0) (7.3) %

Pack and associate fees $ 6.2 $ 6.9 $ 8.0 $ (1.1) (13.8) %

Other $ 0.8 $ 0.8 $ 0.8 $ — — %

Gross profit $ 102.9 $ 1.7 $ 104.6 $ 104.1 $ 0.5 0.5 %

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

Loss from operations $ (1.0) $ 0.6 $ (0.4) $ (0.4) $ — — %

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

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Total $ 132.0 100.0 % $ 137.2 100.0 %

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

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

Sales for the Americas decreased by $5.2 million, or 11.1%, to $41.6 million for 2022 as compared to $46.8 million for the same period in 2021 as we worked through an unprecedented supply challenge that put a headwind on recruiting and contributed to a 10.0% decline in the number of active independent associates and preferred customers, which was partially offset by 1.3% increase in revenue per active independent associate and preferred customer.

Net sales decreased by $5.2 million, or 3.8%, for 2023, as compared to 2022.

For the year ended December 31, 2023, our operations outside of the Americas accounted for 67.6% of our consolidated net sales, as compared to 69.7% in 2022.

Sales for the Americas increased by $1.2 million, or 2.9%, to $42.8 million for 2023 as compared to $41.6 million for the same period in 2022.

This increase was primarily due to a 4.4% increase in revenue per active independent associate and preferred customer, which was partially offset by a 1.4% decline in the number of active independent associates and preferred customers.

Sales in the Americas includes the Mexico region.

As a result of the strengthening of the Mexican Peso in 2023, foreign currency exchange had the effect of increasing revenue by $0.5 million for the year ended December 31, 2023, as compared to the same period in 2022.

During 2023, Asia/Pacific sales decreased by $4.4 million, or 5.3%, to $79.4 million as compared to $83.8 million for 2022.

Foreign currency exchange had the effect of decreasing revenue by $9.3 million for the year ended December 31, 2022, as compared to the same period in 2021 and partially explains the 10.4% decrease in revenue per active independent associate and preferred customer.

Foreign currency exchange had the effect of decreasing revenue in 2023 by $1.9 million, as compared to the same period in 2022.

The currency impact is primarily due to the weakening of the Korean Won, Japanese Yen and Australian Dollar.

The numbers of active independent associates and preferred customers decreased 6.9%.

During 2022, EMEA sales decreased by $3.5 million, or 22.9%, to $11.8 million as compared to $15.3 million for 2021.

This decrease was primarily due to a 25.9% decrease in the number of active independent associates and preferred customers, which was partially offset by a 0.6% increase in revenue per active independent associate and preferred customer.

In addition, net sales in the Asia/Pacific region was negatively impacted by a 12.2% decrease in revenue per active independent associate and preferred customer, which was partially due to the foreign exchange rate.

Offsetting these declines, the number of active independent associates and preferred customers in the Asia/Pacific region increased 7.9% in 2023 as compared to 2022 .

For the year ended December 31, 2023, EMEA sales decreased by $2.0 million, or 16.9%, to $9.8 million as compared to $11.8 million for 2022.

This decrease was primarily due to a 14.5% decrease in the number of active independent associates and preferred customers, and a 2.9% decrease in revenue per active independent associate and preferred customer.

Foreign currency exchange had the effect of decreasing revenue by $0.9 million for the year ended December 31, 2023, as compared to the same period in 2022.

The currency impact is primarily due to the weakening of the South African Rand, British Pound and Euro.

The currency impact is primarily due to the weakening of the South African Rand.

Our sales mix for the years ended December 31, was as follows (in millions, except percentages):

2022 2021 Dollar Percentage

Consolidated product sales $ 130.2 $ 151.0 $ (20.8) (13.8) %

Consolidated pack sales and associate fees 6.2 8.0 (1.8) (22.5) %

Consolidated other 0.8 0.8 — — %

Total consolidated net sales $ 137.2 $ 159.8 $ (22.6) (14.1) %

2023 2022 Constant Dollar Change

Total $ Translation Adjustment Non-GAAP Measure:

Constant $ GAAP

Total $ Dollar Percent

Product sales $ 125.3 $ 2.2 127.5 $ 130.2 $ (2.7) (2.1) %

Our product sales are made to our independent associates and preferred customers at published wholesale prices.

Product sales for the year ended December 31, 2022 decreased by $20.8 million, or 13.8%, to $130.2 million, as compared to $151.0 million for the same period in 2021.

The decrease in product sales was primarily due to a decrease in the average order value.

The average order value in 2022 was $175, as compared to $190 for the same period in 2021.

The number of orders processed during the year ended December 31, 2022 decreased by 5.6% as compared to the same period in 2021.

Pack sales and associate fees 5.6 0.1 5.7 6.2 (0.5) (8.1) %

Other 1.1 — 1.1 0.8 0.3 37.5 %

Total $ 132.0 $ 2.3 $ 134.3 $ 137.2 $ (2.9) (2.1) %

Our product sales consist primarily of sales made to our independent associates and preferred customers at published wholesale prices.

Product sales for the year ended December 31, 2023 decreased by $4.9 million, or 3.8%, to $125.3 million, as compared to $130.2 million for the same period in 2022.

On a constant dollar basis, product sales in 2023 decreased $2.7 million, or 2.1%, as compared to 2022.

The decrease in product sales in 2023 reflects a 7.2% decrease in the number of orders processed, partially offset by an increase in the average order value of $180, as compared to $175 for the same period in 2022.

We attribute the lower number of orders processed in 2023 to the loss of continuing independent associates and preferred customers as compared to the recruitment of new independent associates and preferred customers.

As a group, continuing independent associates and preferred customers place more orders than new recruits.

Therefore, the decline in continuing independent associates and preferred customers had a larger impact on the number of orders we received in 2023.

The approximate number of active new and continuing active associates and preferred customers who purchased our products or packs or paid associate fees during the twelve months ended December 31 was as follows:

New 79,000 54.5 % 75,000 51.7 %

Continuing 66,000 45.5 % 70,000 48.3 %

Total 145,000 100.0 % 145,000 100.0 %

The Company collects associate fees in lieu of selling packs in certain markets.

Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year.

Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions and incentives for that year.

The Company collected associate fees in lieu of pack sales within the United States, Canada, South Africa, Japan, Australia, New Zealand, Singapore, Hong Kong, Taiwan, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, Spain, Sweden and the United Kingdom.

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There are several pack options available to our associates.

Pack sales may be completed during the final stages of the registration process, entitling the Associates to earn commissions, benefits, and incentives for that year.

Pack sales may be completed during the final stages of the registration process, entitling the Associates to earn commissions and incentives for that year.

These packs can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption.

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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 years ended December 31 ( in millions, except percentages):

2022 2021 Dollar Percentage

New $ 0.4 $ 0.5 $ (0.1) (20.0) %

Continuing 5.8 7.5 (1.7) (22.7) %

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

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

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

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

• registered our most popular products with the appropriate regulatory agencies in all countries of operations where possible;

• rolled out new products;

• launched 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;

• explored new advertising and educational tools to broaden name recognition;

• implemented changes to our global associate career and compensation plan.

The approximate number of active new and continuing active associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended December 31 was as follows:

New 75,000 51.7 % 84,000 51.5 %

Continuing 70,000 48.3 % 79,000 48.5 %

Total 145,000 100.0 % 163,000 100.0 %

Other sales consisted of:

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and (iv) a reserve for estimated sales refunds and returns.

Promotional materials, training, database applications and business management tools to support our independent associates, which in turn helps stimulate product sales.

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

Promotional materials, training, database applications and business management tools are utilized to support our independent associates, which in turn helps stimulate product sales.

For the years ended December 31, 2023 and 2022, other sales were $1.1 million and $0.8 million, respectively.

For the year ended December 31, 2023, gross profit decreased by $1.3 million, or 1.2%, to $102.9 million, as compared to $104.1 million for the same period in 2022.

Gross profit as a percentage of net sales decreased to 75.9% for 2022, as compared to 78.6% for 2021 due to the impacts of foreign exchange (mostly Korea Won and Japanese Yen), and rising costs in our supply chain.

The decrease in gross profit in dollar terms is principally due to the decline in sales.

Gross profit as a percentage of net sales increased to 78.0% for 2023, as compared to 75.9% for 2022, largely due to reduced costs of freight and shipping and other supply chain initiatives, partially offset by certain raw materials price increases.

Commission and Incentives

As sales declined, commission expenses decreased for the year ended December 31, 2022, by 14.8%, or $9.1 million to $52.5 million, as compared to $61.6 million for the same period in 2021.

Commissions as a percentage of net sales were 38.2% for the year ending December 31, 2022 and 38.5% for the same period in the prior year.

Incentive costs increased for the year ended December 31, 2022 by 36.4%, or $0.8 million, to $3.0 million as compared to $2.2 million for the same period in 2021.

The costs of incentives, as a percentage of net sales increased to 2.2% for the year ended December 31, 2022, as compared to 1.4% for the same period in 2021.

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

Commission expenses decreased $1.5 million, or 2.9%, to $51.0 million, for the year ended December 31, 2023, as compared to $52.5 million for the same period in 2022.

Commissions are earned on sales.

Commission expense in dollar terms decreased in 2023 primarily due to a decline in our sales in the year.

Commissions as a percentage of net sales was 38.6% for the year ended December 31, 2023 and 38.2% for the same period in the prior year.

Incentive costs decreased for the year ended December 31, 2023 by 13.3%, or $0.4 million, to $2.6 million as compared to $3.0 million for the same period in 2022.

The decrease was related to travel incentives in the Americas and Asia/Pacific.

The costs of incentives, as a percentage of net sales, decreased to 2.0% for the year ended December 31, 2023, as compared to 2.2% for the same period in 2022.

Selling and Administrative Expenses

Selling and administrative expenses include a combination of both fixed and variable expenses.

These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses.

For the year ended December 31, 2022, overall selling and administrative expenses decreased by $1.9 million, or 6.7%, to $27.5 million, as compared to $29.4 million for the same period in 2021.

The decrease in selling and administrative expenses consisted of a $1.1 million decrease in payroll costs, a $0.5 million decrease in marketing costs and a $0.3 million decrease in distribution costs.

Other Operating Costs

Other operating costs include accounting/legal/consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.

For the year ended December 31, 2022, other operating costs decreased by $1.6 million, or 7.7%, to $20.0 million, as compared to $21.6 million for the same period in 2021.

For the year ended December 31, 2022, other operating costs, as a percentage of net sales, were 14.6%, as compared to 13.5% for the same period in 2021.

The decrease was due to a $0.7 million decrease in credit card fees, the resolution of the Korea Customs Audit (see Note 11, Commitments and Contingencies) for a $0.4 million lower cost than we expected, and a $0.3 million decrease in bad debt expense, and lower professional fees.

These expenses consist of compensation and benefits for employees, temporary and contract labor and marketing-related expenses, accounting, legal, and consulting fees, travel and entertainment expenses, credit card processing fees, off-site storage fees, utilities, bad debt, and other miscellaneous operating expenses.

For the years ended December 31, 2023 and 2022, overall selling and administrative expenses were $48.6 million and $47.4 million, respectively.

The increase of $1.2 million primarily includes $0.9 million increase in legal and consulting fees related to the start-up of our NEMO business, $0.8 million increase in marketing costs, $0.5 million increase in our provision of bad debt, offset by a $1.0 million decrease in payroll and benefits costs .

Depreciation and Amortization Expense

For the years ended December 31, 2022 and 2021, depreciation and amortization expense was $1.6 million and $1.7 million, respectively.

Other (Expense) Income, net

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

For each of the years ended December 31, 2023 and 2022, depreciation and amortization expense remained constant at $1.6 million.

Other Expense, net

Primarily due to foreign exchange losses, other expense wa s $0.2 million for each of the years ended December 31, 2023 and 2022.

Provision for Income Taxes

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Country 2023 2022

Australia 30.0 % 30.0 %

Bermuda — % — %

Canada 26.5 % 26.5 %

35.0 % 31.0 %

Cyprus 12.5 % 12.5 %

Denmark 22.0 % 22.0 %

Gibraltar (3)

12.5 % 11.3 %

China 25.0 % 25.0 %

Hong Kong 16.5 % 16.5 %

Japan 36.1 % 34.6 %

Mexico 30.0 % 30.0 %

Netherlands (4)

Norway 22.0 % 22.0 %

Republic of Korea 20.9 % 22.0 %

20.0 % 20.0 %

Singapore 17.0 % 17.0 %

South Africa 28.0 % 28.0 %

Sweden 20.6 % 20.6 %

Switzerland (6)

Taiwan 20.0 % 20.0 %

18.0 % 18.0 %

United Kingdom 19.0 % 19.0 %

United States (1)

22.2 % 22.2 %

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

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

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

2022, the Company liquidated the entity.

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

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

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

(6) On July 1, 2019, the Company suspended operations in Switzerland, but maintains the legal entity.

(7) On March 21, 2014, the Company suspended operations in the Ukraine, but maintains the legal entity, Mannatech Ukraine LLC.

(8) Includes blended state effective rate of 2.2% for 2022 and 2021 in addition to the U.S federal statutory rate of 21%.

(1) Includes blended state effective rate of 1.2% for 2023 and 2022 in addition to the U.S federal statutory rate of 21% and is now taxed at the full.

Income from our international operations is subject to taxation in the countries in which we operate.

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For each of the years ended December 31, 2023 and 2022, the Company’s effective tax rate was (98.1)% and (837.4)%, respectively.

In 2022, the Company’s effective tax rate differed from the statutory rate due to additional taxes assessed as a result of the settlement of the income tax audit in Korea, the Company recording a valuation allowance on U.S.

In 2023, the Company’s effective tax rate differed from the statutory rate due to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions.

In 2022, the Company's effective rate differed from the statutory rate due to additional taxes assessed as a result of the settlement of the income tax audit in Korea, the Company recording a valuation allowance on U.S.

deferred tax assets largely driven by changes in expected earnings mix between jurisdictions and the relative impact of these items on decreased earnings.

In 2021, the Company's effective rate differed from the statutory rate due to the effect of changes in valuation allowances recorded in certain jurisdictions, taking the IRC Section 250 deduction and applying tax credits.

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

The provisions of Accounting Standards Codification Topic 740, Income Taxes (“ASC Topic 740”) require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met.

A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset.

Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified.

The valuation allowance against the Company’s deferred tax assets consisted of the following at December 31 (in thousands) :

Country 2022 2021

China $ 0.4 $ 0.5

Colombia — 0.5

Cyprus 0.2 0.2

Mexico 1.8 1.9

Norway 0.1 0.1

South Africa 0.2 0.2

Switzerland 0.3 0.5

Taiwan 0.6 0.6

United States 6.2 3.4

Total $ 9.8 $ 7.9

We believe the impact of seasonality on our consolidated results of operations is minimal.

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• government regulations;

• global pandemic;

• the outcome of certain lawsuits;

• the perception and acceptance of network marketing;

• the consumer perception of our products and overall operations;

• cultural events and vacation patterns (for example, most Asian markets celebrate their respective local New Year in the first quarter, which generally has a negative effect on that quarter).

As a result of these and other factors, our quarterly results may vary significantly in the future.

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Cash and Cash Equivalents

As of December 31, 2022, our cash and cash equivalents and restricted cash decreased by 40.7%, or $10.4 million, to $15.2 million from $25.6 million as of December 31, 2021.

Cash and cash equivalents was $7.7 million at December 31, 2023, as compared to $13.8 million as of December 31, 2022.

The current portion of restricted cash was $0.9 million at December 31, 2023 and 2022.

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

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and (iii) Australia building lease collateral.

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

Fluctuations in currency rates produced a decrease of $2.4 million in cash and cash equivalents in 2022 as compared to a decrease of $2.7 million in 2021.

Fluctuations in currency rates produced a decrease of $0.8 million in cash and cash equivalents in 2023.

Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, and periodic cash dividends.

We fund our business objectives, operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt.

We have historically funded our business objectives, operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt.

Working Capital

Working capital represents total current assets less total current liabilities.

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

from $12.7 million at December 31, 2021.

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

At December 31, 2023, our working capital was $1.9 million as compared to $5.1 million at December 31, 2022.

The decrease in working capital principally reflects the decrease in our cash balance which was utilized to fund our operations in 2023, as well as pay down our current liabilities and fund financing activities .

Net Cash Flows

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Operating Activities

Cash provided by operating activities decreased by $13.4 million for the year ended December 31, 2022, as compared to the same period in 2021.

For the year ended December 31, 2022, this decrease was due to an operating loss and cash invested in inventory.

Cash used in operating activities was $2.4 million for the year ended December 31, 2023, as compared to $2.6 million in the prior year.

Investing Activities

During the year ended December 31, 2022 and 2021, we invested $1.1 million and $0.7 million in computer hardware and software, respectively.

For the year ended December 31, 2023 and 2022, we invested $0.7 million and $1.1 million, respectively.

During the year ended December 31, 2023, we invested approximately $0.7 million in back-office software projects and equipment, reported as property and equipment.

During the year ended December 31, 2022, we invested $1.1 million in computer hardware and software.

Financing Activities

For the year ended December 31, 2022, our financing activities used cash of $4.3 million compared to cash used of $9.3 million for the same period of 2021.

For the year ended December 31, 2023, we utilized $1.9 million for financing activities as compared to $4.3 million for the same period of 2022.

For the year ended December 31, 2023, we used approximately $1.0 million in the repayment of finance lease obligations and other long-term liabilities, $0.7 million in the payment of dividends to shareholders, and $0.2 million in the repurchase of common stock.

For the year ended December 31, 2021, we used approximately $0.4 million in the repayment of finance lease obligations and other long term liabilities, $4.3 million in the payment of dividends to shareholders, and $5.1 million for the repurchase of common stock, which was partially offset by $0.5 million cash provided by the exercise of stock options.

For the year ended December 31, 2022, we used approximately $0.8 million in the repayment of finance lease obligations and other long-term liabilities, $1.5 million in the payment of dividends to shareholders, and $2.0 million for the repurchase of common stock.

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 12 months.

As our primary source of liquidity is our cash flows from operations, this will be dependent on our ability to maintain and/or continue to improve revenue as compared to our operational expenses.

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.

As of December 31, 2022 and 2021, cash and cash equivalents held in bank accounts in foreign countries totaled $11.3 million and $22.6 million, respectively.

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.

The Canada Revenue Agency is auditing the Company's GST filings from January 2019 through April 2021.

Management believes the likelihood of an additional GST liability or penalty from the audit is remote and therefore has not accrued a liability related to this audit at December 31, 2021.

For more information see Note 1, Organization and Summary of Significant Accounting Policies, Note 7, Income Taxes , Note 11, Commitments and Contingencies, and Note 12, Litigation to our Consolidated Financial Statements.

We believe our existing liquidity and projected cash flows from operations are adequate to fund our normal expected future business operations for the next 12 months.

As of December 31, 2023 and 2022, c ash and cash equivalents totaled $7.7 million and $13.8 million, respectively.

While our cash utilization in 2022 and 2023 has reduced our short-term liquidity, we do not believe the impact will prohibit us from meeting our obligations or from executing our business strategy.

See “Item 1A – Risk Factors – Risks Affecting Our Business and Industry - We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.”

We have contractual purchase commitments with certain raw material suppliers to purchase minimum quantities and to ensure exclusivity of our raw materials and the proprietary nature of our products.

At December 31, 2023, we have one supply agreement that requires the Company to purchase an aggregate of $4.2 million through 2024, with no purchase commitments thereafter.

We are currently negotiating with the supplier to amend the agreement to meet current demand levels for these materials.

We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and help ensure quality control standards.

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We also have finance lease liabilities of $1.2 million and lease restoration liabilities of $0.4 million.

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

In recent years, as we have responded to COVID-19, we have taken steps to protect the health, safety and well-being of our customers, associates, employees, and communities by closing some offices and equipping various staff members to work remotely.

The Company depends on an independent salesforce of distributors to market and sell its products to consumers.

Developments such as social distancing and shelter-in-place directives has impacted their ability to engage with potential and existing customers.

The adverse economic effects of COVID-19 include government restriction and changes in consumer demand for the Company’s products.

The Company has rescheduled corporate sponsored events, and in some cases, our associates have canceled sales meetings.

Prolonged workforce disruptions, continued disruption in our supply chain, and potential decreases in consumer demands could negatively impact our sales as well as the Company’s overall liquidity in the next twelve months, however, such impact is currently unknown.

As our primary source of liquidity has historically been our cash flows from operations, our liquidity is dependent on our ability to maintain and/or continue to improve revenue as compared to our operational expenses.

In this regard, our management has established a 2024 business reorganization plan focusing on revenue growth, margin improvement and cost control and reduction.

Our current CEO has announced his retirement effective April 1, 2024.

However, he has agreed to continue to serve as an advisor to the Company to establish certain programs aimed at increasing our revenues and growing our preferred customer and associate base.

Concurrent with the retirement of our existing CEO, our current President and Chief Operating Officer has been promoted to the position of President & CEO.

Furthermore, our management has established a plan to improve margin through a price increase, continued focus on supply chain costs, and certain compensation plan adjustments, as well as to reorganize certain functional operations and reduce our fixed selling and administrative overhead.

However, if our reorganization plans are not successful, or if we are unable to renegotiate a favorable outcome to our minimum purchase commitment contracts, or if we experience prolonged workforce disruptions, disruption in our supply chain, and/or potential decreases in consumer demands, our sales and our overall liquidity in the next twelve months could be negatively impacted.

If our existing capital resources or cash flows become insufficient to meet current business plans, projections, and existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if at all.

We are a multinational company operating in numerous tax jurisdictions.

We are currently not engaged in any tax related audits.

Long Term Liquidity

We believe our cash flows from operations should be adequate to fund our normal expected future business operations and possible international expansion costs for the long term.

As our primary source of liquidity is from our cash flows from operations, this will be dependent on our ability to maintain and/or improve revenue as compared to operational expenses.

As our primary source of liquidity has historically been from our cash flows from operations, this will be dependent on our ability to maintain and/or improve revenue as compared to operational expenses.

However, if our existing capital resources or cash flows become insufficient to meet anticipated business plans and existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if at all.

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We continuously monitor our compliance with the Nasdaq continued listing rules.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements.

Please see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about our Market Risks.

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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 and tax valuation allowances, revenue recognition, sales returns, and deferred revenues, accounting for stock-based compensation, and contingencies and litigation.

We also analyze the need for certain estimates, including the need for such items as allowance for credit losses, inventory reserves, tax valuation allowances, revenue recognition, sales returns, deferred revenues, and accounting for stock-based compensation.

Historically, actual results have not materially deviated from our estimates.

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If circumstances change relating to the various assumptions or conditions used in our estimates, we could experience an adverse effect on our financial position, results of operations, and cash flows.

We have identified the following applicable critical accounting policies and estimates as of December 31, 2022:

We have identified the following applicable critical estimates as of December 31, 2023:

Inventory Reserves

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At each of December 31, 2023 and 2022, our inventory reserves were $0.4 million .

Uncertain Income Tax Positions and Tax Valuation Allowances

As required by ASC Topic 740, we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions.

We base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “ more likely than not” be sustained in an income tax audit.

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.

Therefore, our estimated reserve balances and liability related to uncertain income tax positions may exist for multiple years before the applicable statute of limitations expires or before an issue is resolved by the taxing authority.

Additionally, we may be requested to extend the statute of limitations for tax years under audit.

It is reasonably possible the tax jurisdiction may request that the statute of limitations be extended, which may cause the classification between current and long-term to change.

We believe our tax liabilities related to uncertain tax positions are based upon reasonable judgment and estimates;

however, if actual results materially differ, our effective income tax rate and cash flows could be affected in the period of discovery or resolution.

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

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

We also review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized.

Tax Valuation Allowances

We review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized.

If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance.

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We estimate order delivery dates using weighted averages of historical delivery data periodically provided by our freight carriers.

We record the value of orders shipped but not yet delivered to customers as Deferred Revenue on our Consolidated Balance Sheet.

If our assumptions and estimate of the delivery time from shipment to receipt by the customer changes, the new estimate could have a material impact on our revenues and financial results of operations.

Orders placed by associates or preferred customers constitute our contracts.

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(a) the sale of the product and (b) the loyalty program.

The Company's customer loyalty program conveys a material right to the customer to redeem loyalty points for the purchase of products.

For these contracts, the Company accounts for each of these obligations separately as they are each distinct.

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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 Company provides associates with access to a complimentary three-month package for the Success TrackerTM and Mannatech+ online business tools with the first payment of an associate fee.

The first payment of an associate fee contains three performance obligations:

(a) the associate fee, whereby the Company provides an associate with the right to earn commissions, bonuses and incentives for a year, (b) three months of complimentary access to utilize the Success Tracker™ online tool and (c) three months of complimentary access to utilize the Mannatech+ online business tool.

The transaction price is allocated between the three performance obligations on a relative standalone selling price basis.

The transaction price is allocated between the three performance obligations on a relative standalone selling price basis and revenue is recognized over the period that access to the tool is active.

Associates do not have complimentary access to online business tools after the first contractual period.

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• Associate and Preferred Customer Product Return Policy.

This policy allows the associate or preferred customer to return an order within one year of the purchase date upon 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.

This policy allows the associate or preferred customer to return an order within one year of the purchase date upon voluntarily terminating his/her account.

If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% processing fee.

We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials.

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

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.

For the year ended December 31, 2022, our assumptions and estimates used to determine the fair value of stock options granted in 2022 were as follows:

2022 Grants May June

Estimated fair value per share of options granted:

$ 9.93 $ 6.72

Dividend yield 2.6 % 3.9 %

Risk-free interest rate 2.9 % 3.4 %

Expected market price volatility 63.6 % 64.9 %

Average expected life of stock options (in years) 4.5 4.5

Historically, our estimates and underlying assumptions have not materially deviated from our actual reported results and rates.

However, we base assumptions we use on our best estimates, which involves inherent uncertainties based on 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 adjust our consolidated financial statements in future periods.

As of December 31, 2022, using our current assumptions and estimates, we anticipate recognizing less than $0.1 million in gross compensation expense through 2023 related to unvested stock options outstanding.

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 December 31, 2022, we had 126,276 shares available for grant in the future.

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 would include an estimated amount for any damages and the probability of losing any threatened legal claims or assessments.

No legal reserve was deemed necessary at December 31, 2022.

The legal reserve is developed in consultation with our general and outside counsel and is based upon a combination of litigation and settlement strategies.

Although we believe that our legal reserves 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 that could reduce net income, earnings per share, and cash flows.

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

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

payments for members’ commissions and these intercompany payments are settled by way of netting set-off with other transactions.

We are seeking an official ruling from the Ministry of Economy and Finance involving the netting of receivables / payables in foreign currency between a Korean resident and a non-resident and whether this should be reported to the Bank of Korea or a designated foreign exchange bank under compliance with the Foreign Exchange Transactions Act ("FETA") of Korea.

If it is confirmed in the ruling that the above transactions are subject to the advance reporting requirement under the FETA, there is a possibility of a penalty for the violation.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis