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Item 2. Management’s Discussion and Analysis

2024-05-14 compared with 2023-11-07 · 113 added, 272 removed, 198 unchanged (66% of the section changed)

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.

The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three months ended March 31, 2024 as compared to the same period in 2023, 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 2023 Annual Report.

Unless stated otherwise, all financial information presented below, throughout this report, and in the condensed 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.

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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:

We currently sell our products in twenty-five countries which we group into three regions:

(i) the Americas (the United States, Canada and Mexico);

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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:

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

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

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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.

Overview of Operating Results

Consolidated net sales for the three months ended March 31, 2024 was $29.4 million, as compared to $34.1 million for the three months ended March 31, 2023, a decrease of $4.7 million, or 13.8%.

For the three months ended March 31, 2024, our net sales decreased $3.9 million, or 11.4% on a Constant dollar basis (see Non-GAAP Financial Measures, below);

and unfavorable foreign exchange caused a $0.8 million decreased in GAAP net sales as compared to the same period in 2023.

The decline in revenues was principally in our Asia/Pacific region reflecting reduced associate recruiting and continued weak economic conditions.

Income from operations was $0.8 million for the three months ended March 31, 2024 as compared to $0.7 million in the same period last year.

On a Constant dollar basis (see Non-GAAP Measures, below), income from operations was unfavorably affected by $0.3 million due to foreign exchange.

Higher gross profit margins reflecting continued improvement in supply chain and product costs, coupled with lower selling and administrative expenses resulting from cost reductions, more than offset the profitability impact from the decline in revenues.

Net income was $1.2 million for the three months ended March 31, 2024, or $0.63 per diluted share, as compared to $0.6 million, or $0.32 per diluted share for the three months ended March 31, 2023.

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):

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended March 31, 2024 and 2023 (in thousands, except percentages):

2024 2023 Change from

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Depreciation and amortization expense 416 1.4 % 387 1.1 % 29 7.5 %

Other operating costs 5,182 15.9 % 5,126 14.4 % 56 1.1 %

Total operating expenses 22,277 75.8 % 25,988 76.2 % (3,711) (14.3) %

Income from operations 820 2.8 % 713 2.1 % 107 15.0 %

Interest (expense) income (17) (0.1) % 19 0.1 % (36) (189.5) %

Interest income, net 18 0.1 % 24 0.1 % (6) (25.0) %

Other income, net 871 3.0 % 333 1.0 % 538 161.6 %

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Net income $ 1,180 4.0 % $ 604 1.8 % $ 576 95.4 %

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

net sales Total

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) %

Non-GAAP Financial Measures

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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.

Three-month period ended September 30, 2023 September 30, 2022 Constant $ Change

(in millions, except percentages)

Total $ Non-GAAP

Constant $ GAAP

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)

Total $ Non-GAAP

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.

A reconciliation non-GAAP financial measures to GAAP results for the three months ended March 31, 2024 and 2023 is presented as follows (in millions, except percentages) :

Three-month period ended March 31, 2024 March 31, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

Constant $ GAAP

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Net sales $ 29.4 $ 0.8 $ 30.2 $ 34.1 $ (3.9) (11.4) %

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 23.1 0.7 23.8 26.7 (2.9) (10.9) %

(Loss) income from operations (0.1) 0.5 2.2 (1.7) (77.3) %

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) :

Income from operations 0.8 0.3 1.1 0.7 0.4 57.1 %

Consolidated net sales for the three months ended March 31, 2024 decreased by $4.7 million, or 13.8%, to $29.4 million, as compared to $34.1 million for the same period in 2023.

Our operations outside of the Americas accounted for approximately 65.3% of our consolidated net sales in the three months ended March 31, 2024, as compared to 69.2% in the same period last year.

Consolidated net sales by region for the three months ended March 31, 2024 and 2023 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) :

Region Nine Months Ended

September 30, 2023 Nine Months Ended

September 30, 2022

March 31, 2024 Three Months Ended

March 31, 2023

Americas $ 10.2 34.7 % $ 10.5 30.8 %

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Total $ 29.4 100.0 % $ 34.1 100.0 %

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.

For the three months ended March 31, 2024, net sales in the Americas decreased by $0.3 million, or 2.9%, to $10.2 million, as compared to $10.5 million for the same period in 2023.

R evenue per active independent associate and preferred customer decreased by 4.4%, which was partially offset by a 1.6% increase in number of active independent associates and preferred customers.

Foreign currency had the effect of increasing revenue by $0.2 million for the three months ended March 31, 2024, as compared to the same period in 2023.

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 .

For the three months ended March 31, 2024, Asia/Pacific net sales decreased by $4.0 million, or 19.0%, to $17.1 million, as compared to $21.1 million for the same period in 2023 .

Revenue per active independent associate and preferred customer decreased 21.9%, which was partially offset by a 3.8% 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.

Foreign currency exchange had the effect of de creasing revenue by $0.9 million for the three months ended March 31, 2024, as compared to the same period in 2023.

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

For the three months ended March 31, 2024, EMEA net sales decreased by $0.4 million, or 16%, to $2.1 million, as compared to $2.5 million for the same period in 2023.

The decrease was primarily due to a 12.0% decrease in the number of active independent associates and preferred customers and an 4.5% 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.

Foreign currency exchange had the effect of decreasing revenue by $0.1 million f or the three months ended March 31, 2024 as compared to the same period in 2023.

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

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;

• 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) %

Our sales mix for the three months ended March 31, was as follows (in millions, except percentages) :

Three-month period ended March 31, 2024 March 31, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

Constant $ GAAP

Total $ Dollar Percent

Product $ 27.9 $ 0.7 $ 28.6 $ 31.9 $ (3.3) (10.3) %

Pack sales and associate fees 1.1 0.1 1.2 2.1 (0.9) (42.9) %

Other 0.4 — 0.4 0.1 0.3 300.0 %

Total $ 29.4 $ 0.8 $ 30.2 $ 34.1 $ (3.9) (11.4) %

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.

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

Product sales for the three months ended March 31, 2024 decreased by $4.0 million, or 12.5%, as compared to the same period in 2023.

On a Constant dollar basis, product sales for the three months ended March 31, 2024 decreased $3.3 million , or 10.3%, as compared to the same period in 2023.

The decrease in product sales for the three months ended March 31, 2024 reflects a 7.1% decrease in the number of orders processed and a decrease in the average order value to $168, as compared to $185 for the same period in 2023.

Recruitment of new independent associates and preferred customers decreased by 13.6% to 16,027 in the first quarter of 2024 from 18,547 in the first quarter of 2023.We attribute the lower number of orders processed in the three months ended March 31, 2024 to a combination of the lower number of new independent associates and preferred customers recruited during the period and the loss of continuing independent associates and preferred customers.

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

Therefore, the decline in continuing independent associates and preferred customers had a larger impact on the number of orders we received in 2024.

The approximate number of new and continuing active independent associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended March 31, 2024 and 2023 were as follows:

New 77,000 53.8 % 75,000 52.4 %

Continuing 66,000 46.2 % 68,000 47.6 %

Total 143,000 100.0 % 143,000 100.0 %

Pack Sales and Associate Fees

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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 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.

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;

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

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.

The decline in pack sales occurred principally in Korea.

Other sales consisted of:

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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.

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 .

For the three months ended March 31, 2024 and 2023, other sales were $0.4 million and $0.1 million, respectively.

For the three months ended March 31, 2024, gross profit decreased by $3.6 million, or 13.5%, to $23.1 million, as compared to $26.7 million for the same period in 2023.

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

For the three months ended March 31, 2024, gross profit as a percentage of net sales increased to 78.6%, as compared to 78.3% for the same period in 2023 largely due to reduced costs of freight and shipping and other supply chain initiatives.

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.

Commission expense for the three months ended March 31, 2024 decreased by 13.4%, or $1.7 million, to $11.2 million, as compared to $12.9 million for the same period in 2023.

Commissions are earned on sales.

Commission expense in dollar terms decreased during the three months ended March 31, 2024 primarily due to a decline in our sales.

For the three months ended March 31, 2024, commissions as a percentage of net sales increased to 38.1% from 37.9% for the same period in 2023.

Incentive costs for the three months ended March 31, 2024 decreased to $0.5 million, as compared to $0.6 million for the same period in 2023 .

For the three months ended March 31, 2024, incentives as a percentage of net sales decreased to 1.7% from 1.9% for the same period in 2023.

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

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.

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 expense, credit card processing fees, off-site storage fees, utilities, bad debt and other miscellaneous operating expenses.

For the three months ended March 31, 2024, selling and administrative expenses decreased by $1.9 million, or 15.5%, to $10.1 million, as compared to $12.0 million for the same period in 2023.

The decrease in selling and administrative expenses was the result of cost reductions implemented in the current period combined with other management initiated cost controls including a $0.7 million decrease in legal and consulting fees and a $0.5 million decrease in payroll costs.

Selling and administrative expenses, as a percentage of net sales, for the three months ended March 31, 2024 decreased to 34.6% from 35.3% for the same period in 2023.

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.

Depreciation and amortization expense was $0.4 million for each of the three months ended March 31, 2024 and 2023.

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.

Due principally to foreign exchange gains and losses , other income was $0.9 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively .

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:

Our statutory income tax rates for key jurisdictions are as follows, for the three months ended March 31:

Country 2024 2023

25.0 % 25.0 %

Hong Kong 16.5 % 16.5 %

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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.

For the three months ended March 31, 2024 and 2023, the Company’s effective tax rate was 36.0% and 43.6%, respectively.

The effective tax rates for the three months ended March 31, 2024 and 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.

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.

As of March 31, 2024, our cash and cash equivalents increased by 2.3%, or $0.2 million, to $7.9 million from $7.7 million as of December 31, 2023.

The Company is required to restrict cash for:

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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.

The current portion of restricted cash balances was $0.9 million at each of March 31, 2024 and December 31, 2023.

The long-term portion of restricted cash balances was $0.7 million at each of March 31, 2024 and December 31, 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 did not pay a dividend in the current quarter in order to preserve approximately $0.4 million cash.

We did not pay a dividend in the current quarter.

Business objectives, operations, and expansion of operations are funded through net cash flows from operations rather than incurring long-term debt.

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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.

At March 31, 2024 and December 31, 2023, our working capital was $2.1 million and $1.9 million , respectively.

Net Cash Flows

Our net consolidated cash flows consisted of the following, for the nine months ended September 30 (in millions) :

Our net consolidated cash flows consisted of the following, for the three months ended March 31 (in millions) :

Provided by (Used in):

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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.

Operating activities provided $1.9 million cash for the three months ended March 31, 2024 as compared to $1.4 million for the same period in 2023.

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 .

At each of the three months ended March 31, 2024 and 2023, we invested cash of $0.1 million principally for 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.

For the three months ended March 31, 2024 and 2023, our financing activities used cash of $0.3 million and $0.6 million, respectively.

For the three months ended March 31, 2024, we used $0.3 million in the repayment of finance lease obligations.

For the three months ended March 31, 2023, we used $0.4 million in payments of dividends to shareholders and $0.2 million in the repayment of finance lease obligations.

General Liquidity and Cash Flows

Short Term Liquidity

As of March 31, 2024, our cash and cash equivalents was $7.9 million.

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.

We have contractual purchase commitments with certain raw materials suppliers to purchase minimum quantities.

At March 31, 2024, we have one supply agreement which was amended on April 18, 2024, that requires the Company to purchase an aggregate of $3.4 million through 2025, with no purchase commitments thereafter.

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

These agreements do not require us to purchase any minimum quantities.

We have 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.

At March 31, 2024, our operating lease liabilities were $3.9 million, of which $1.7 million was recorded in Accrued expenses and $2.2 million was recorded in Other long-term liabilities.

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

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

In this regard, our management has established a 2024 business reorganization plan focusing on revenue growth, margin improvement and cost control and reduction, including a plan to improve margin through a price increase, continued focus on supply chain costs, and certain compensation plan adjustments, as well as to reorganize certain functional operations and reduce our fixed selling and administrative overhead.

However, if our reorganization plans are not successful, or if we experience 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.

On March 11, 2024, the Company’s Board of Directors authorized the Company to enter into unsecured Loan and Promissory Note agreements (“Promissory Notes”) with three related parties, who are members of the Company’s Board of Directors, and who are current stockholders of the Company, in an aggregate principal amount of $3.6 million.

The purpose of the borrowing is to provide funds to the Company for general working capital needs, including payment to vendors, expansion of the Company’s non-US operations, technology investment primarily for improving the customer ordering process and software updates to improve visibility of sales associate activity.

The Company received a fairness opinion on the terms of the Promissory Notes on April 15, 2024, finding that the terms of the Promissory Notes are fair from a financial point of view.

We completed the financing on April 23, 2024.

Long Term Liquidity

We believe our cash flows from operations should be adequate to fund our normal expected future business operations.

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 or improve revenue as compared to operational expenses.

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CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP.

Our condensed 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.

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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.

However, we caution readers that actual results could differ from our estimates and assumptions applied in the preparation of our condensed 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.

We have identified the following applicable significant accounting policies and critical estimates as of March 31, 2024.

Inventory Reserves

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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.

Tax Valuation Allowances

As of March 31, 2024, there was nothing recorded in other long-term liabilities on our condensed 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.

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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.

recognize revenue from shipped packs and products upon receipt by the customer.

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

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

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

Corporate-sponsored event revenue is recognized when the event is held

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Historically, our sales returns have not materially changed through the years and have averaged 0.5% or less of our gross sales.

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.

Estimated fair value per of options granted:

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.

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-Q

Item 2. Management’s Discussion and Analysis