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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-13 · 138 added, 134 removed, 266 unchanged (51% 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 six months ended June 30, 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.

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, 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.

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(ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom);

and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Thailand, Hong Kong, and China).

and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Thailand, Hong Kong, Taiwan and China).

We also ship our products to customers in the following countries:

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

During the quarter ended June 30, 2024 the Company liquidated its entity in Sweden, Mannatech Sverige AB.

During the second quarter of 2024 the Company liquidated its entity in Sweden, Mannatech Sverige AB.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 136,000 active associates and preferred customer positions held by individuals that purchased our products and/or packs or paid associate fees during the last twelve months, who we refer to as current associates and preferred customers .

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Overview of Operating Results

Consolidated net sales for the three months ended June 30, 2024 was $27.7 million, as compared to $32.6 million for the three months ended June 30, 2023, a decrease of $4.9 million, or 14.9%.

Consolidated net sales for the six months ended June 30, 2024 was $57.1 million, as compared to $66.7 million for the six months ended June 30, 2023, a decrease of $9.6 million, or 14.4%.

The decline in revenues was principally due to supply chain constraints, items on back order, and some weakening of economic conditions in Asia.

The decrease in revenue during the six months ended June 30, 2024 was accompanied by a 1.4% drop in gross profit margins due to the effects of supply chain disruptions, which increased fulfillment costs.

Despite these challenges, management continued to prioritize the reduction of selling and administrative expenses as a countermeasure to soften the impact on profitability.

These efforts yielded a $1.4 million reduction in payroll costs and $1.3 million reduction in consulting fees, compared with the six months ended June 30, 2023.

Foreign currency gains of $0.9 million and $1.1 million in the quarters ended March 31, 2024 and June 30, 2024, respectively, were related to the strengthening of the U.S.

Foreign exchange gains also included a one-time gain of $0.2 million during the quarter ended June 30, 2024 attributable to the liquidation of the Company’s entity in Sweden.

Net loss was $0.6 million for the three months ended June 30, 2024, or $0.33 per diluted share, as compared to a net loss of $1.1 million, or $0.59 per diluted share for the three months ended June 30, 2023.

Net income was $0.6 million for the six months ended June 30, 2024, or $0.30 per diluted share, as compared to a net loss of $0.5 million , or $0.27 per diluted share for the three months ended June 30, 2023.

Consolidated net sales for the three months ended September 30, 2024 was $31.7 million, as compared to $32.6 million for the three months ended September 30, 2023, a decrease of $0.9 million, or 2.5%.

Consolidated net sales for the nine months ended September 30, 2024 was $88.9 million, as compared to $99.3 million for the nine months ended September 30, 2023, a decrease of $10.4 million, or 10.5%.

The decline in revenues was principally due to slowing demand in Asia due to weakened economic conditions, relative to the prior year.

The decrease in revenue during the nine months ended September 30, 2024 was accompanied by a 2.2% decrease in gross profit margins, primarily due to increases in product costs and $0.6 million of inventory markdowns.

To mitigate the impacts to profitability, management continued to prioritize the reduction of selling and administrative expenses, which yielded a $4.3 million reduction in payroll costs and $1.5 million reduction in consulting and professional services costs, compared with the nine months ended September 30, 2023.

Net realized and unrealized foreign currency loss for the quarter ended September 30, 2024 was $1.5 million, primarily related to the effects of translation of the Company's balance sheet as the U.S.

Dollar strengthened relative to other currencies.

The quarter ended September 30, 2023 resulted in a foreign exchange gain of $0.3 million.

Net realized and unrealized foreign currency gains for the nine months ended September 30, 2024 and September 30, 2023 were $0.5 million and $0.8 million, respectively.

These were primarily related to the effects of translation gains and losses on the Company's balance sheet as the U.S.

Dollar strengthened relative to other currencies.

Foreign currency gains also included a one-time gain of $0.2 million during the quarter ended September 30, 2024 attributable to the liquidation of the Company’s entity in Sweden.

Net loss was $0.3 million for the three months ended September 30, 2024, or $0.17 per diluted share, as compared to net income of $18,000, or $0.01 per diluted share for the three months ended September 30, 2023.

Net income was $0.2 million for the nine months ended September 30, 2024, or $0.12 per diluted share, as compared to a net loss of $0.5 million , or $0.26 per diluted share for the nine months ended September 30, 2023.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended June 30, 2024 and 2023 (in thousands, except percentages):

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended September 30, 2024 and 2023 (in thousands, except percentages):

2024 2023 Change from

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Total operating expenses 22,733 71.7 % 25,756 79.1 % (3,023) (11.7) %

Loss from operations (1,143) (4.1) % (954) (2.9) % (189) 19.8 %

Income from operations 887 2.8 % 172 0.5 % 715 415.7 %

Interest expense, net (109) (0.3) % (17) (0.1) % (92) 541.2 %

Other income, net 1,120 4.0 % 150 0.5 % 970 646.7 %

Loss before income taxes (128) (0.5) % (814) (2.5) % 686 (84.3) %

Income tax expense (496) (1.8) % (291) (0.9) % (205) 70.4 %

Net loss $ (624) (2.2) % $ (1,105) (3.4) % $ 481 (43.5) %

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the six months ended June 30, 2024 and 2023 (in thousands, except percentages):

Other (expense) income, net (1,495) (4.7) % 320 1.0 % (1,815) (567.2) %

(Loss) income before income taxes (717) (2.3) % 475 1.5 % (1,192) (250.9) %

Income tax benefit (expense) 389 1.2 % (457) (1.4) % 846 (185.1) %

Net (loss) income $ (328) (1.0) % $ 18 0.1 % $ (346) (1,922.2) %

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023

The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the nine months ended September 30, 2024 and 2023 (in thousands, except percentages):

2024 2023 Change from

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Total operating expenses 67,530 76.0 % 78,288 78.9 % (10,758) (13.7) %

Loss from operations (322) (0.6) % (241) (0.4) % (81) 33.6 %

Interest (expense) income, net (87) (0.2) % 14 — % (101) (721.4) %

Income (loss) from operations 565 0.6 % (69) (0.1) % 634 (918.8) %

Interest expense, net (196) (0.2) % (3) — % (193) 6,433.3 %

Other income, net 495 0.6 % 803 0.8 % (308) (38.4) %

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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.

For the three and six months ended June 30, 2024, our net sales decreased $4.2 million and $8.1 million, or 12.9% and 12.1% on a Constant dollar basis, respectively (see reconciliation of Non-GAAP Financial Measures in the tables below);

For the three and nine months ended September 30, 2024, our net sales decreased $0.4 million and $8.5 million, or 1.2% and 8.6% on a Constant dollar basis, respectively (see reconciliation of Non-GAAP Financial Measures in the tables below);

and unfavorable foreign exchange caused a $0.5 million and $1.9 million decrease in GAAP net sales as compared to the same periods in 2023, respectively.

A reconciliation non-GAAP financial measures to GAAP results for the three and six months ended June 30, 2024 and 2023 is presented as follows (in millions, except percentages) :

Three-month period ended June 30, 2024 June 30, 2023 Constant $ Change

A reconciliation non-GAAP financial measures to GAAP results for the three and nine months ended September 30, 2024 and 2023 is presented as follows (in millions, except percentages) :

Three-month period ended September 30, 2024 September 30, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

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Gross profit 23.6 0.4 24.0 25.9 (1.9) (7.3) %

Loss from operations (1.1) 0.1 (1.0) (1.0) — — %

Six-month period ended June 30, 2024 June 30, 2023 Constant $ Change

Income from operations 0.9 0.1 1.0 0.2 0.8 400.0 %

Nine-month period ended September 30, 2024 September 30, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

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Gross profit 68.1 1.5 69.6 78.2 (8.6) (11.0) %

(Loss) income from operations (0.3) $ 0.4 0.1 (0.2) 0.3 (150.0) %

Income (loss) from operations 0.6 $ 0.5 1.1 (0.1) 1.2 (1,200.0) %

Net Sales by Region

Operations outside of the Americas accounted for approximately 65.7% of our consolidated net sales in the three months ended June 30, 2024, as compared to 67.5% in the same period last year.

Our operations outside of the Americas accounted for approximately 65.5% of our consolidated net sales in the six months ended June 30, 2024, as compared to 68.4% in the same period last year.

Consolidated net sales by region for the three months ended June 30, 2024 and 2023 were as follows (in millions, except percentages) :

Operations outside of the Americas accounted for approximately 66.6% of our consolidated net sales in the three months ended September 30, 2024, as compared to 67.2% in the same period last year.

Our operations outside of the Americas accounted for approximately 65.8% of our consolidated net sales in the nine months ended September 30, 2024, as compared to 68.0% in the same period last year.

Consolidated net sales by region for the three months ended September 30, 2024 and 2023 were as follows (in millions, except percentages) :

Region Three Months Ended

June 30, 2024 Three Months Ended

June 30, 2023

September 30, 2024 Three Months Ended

September 30, 2023

Americas $ 10.6 33.4 % $ 10.7 32.8 %

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Total $ 31.7 100.0 % $ 32.6 100.0 %

Consolidated net sales by region for the six months ended June 30, 2024 and 2023 were as follows (in millions, except percentages) :

Region Six Months Ended

June 30, 2024 Six Months Ended

June 30, 2023

Consolidated net sales by region for the nine months ended September 30, 2024 and 2023 were as follows (in millions, except percentages) :

Region Nine Months Ended

September 30, 2024 Nine Months Ended

September 30, 2023

Americas $ 30.4 34.2 % $ 31.8 32.0 %

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Total $ 88.9 100.0 % $ 99.3 100.0 %

For the three months ended June 30, 2024, net sales in the Americas decreased by $1.1 million, or 10.4%, to $9.5 million, as compared to $10.6 million for the same period in 2023.

R evenue per active independent associate and preferred customer decreased by 13.3% , which was partially offset by a 3.3% increase in number of active independent associates and preferred customers.

Foreign currency had no effect on revenue f or the three months ended June 30, 2024 when compared to the same period in 2023.

For the six months ended June 30, 2024, net sales in the Americas decreased by $1.4 million, or 6.6%, to $19.7 million, as compared to $21.1 million for the same period in 2023.

R evenue per active independent associate and preferred customer decreased by 9.6% , 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 $0.1 million for the six months ended June 30, 2024, as compared to the same period in 2023.

The currency impact is primarily due to the strengthening of the Mexican Peso.

For the three months ended June 30, 2024, Asia/Pacific net sales decreased by $3.4 million, or 17.6%, to $15.9 million, as compared to $19.3 million for the same period in 2023 .

Revenue per active independent associate and preferred custom er decreased 19.2%, which was partially offset by a 1.9% increase in the number of active independent associates and preferred customers.

In addition, due to supply chain issues we def erred a key product promotion in Korea to later in the year, which drove the decline in revenue in Korea.

Foreign currency exchange had the effect of decreasing revenue by $0.7 million for the three months ended June 30, 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 six months ended June 30, 2024, Asia/Pacific net sales decreased by $7.4 million, or 18.3%, to 33.0 million, as compared to 40.4 million for the same period in 2023 .

Revenue per active independent associate and preferred customer decreased 19.8%, which was partially offset by a 5.1% increase in the number of active independent associates and preferred customers.

We def erred a key product promotion in Korea to later in the year due to supply chain issues , which drove the decline in revenue in Korea.

Foreign currency exchange had the effect of decreasing revenue by $1.5 million for the six months ended June 30, 2024, as compared to the same period in 2023.

For the three months ended September 30, 2024, net sales in the Americas decreased by $0.1 million, or 0.9%, to $10.6 million, as compared to $10.7 million for the same period in 2023.

The number of active independent associates and preferred customers decreased by 3.7%, which was partially offset by a 2.9% increase in revenue per active independent associate and preferred customer.

Foreign currency had the effect of decreasing revenue by $0.2 million f or the three months ended September 30, 2024 when compared to the same period in 2023.

T he currency impact is primarily due to the weakening of the Mexican Peso.

For the nine months ended September 30, 2024, net sales in the Americas decreased by $1.4 million, or 4.4%, to $30.4 million, as compared to $31.8 million for the same period in 2023.

R evenue per active independent associate and preferred customer decreased 0.7% , which was partially offset by a 0.5% increase in number of active independent associates and preferred customers.

Foreign currency had no effect on revenue in the Americas for the nine months ended September 30, 2024, as compared to the same period in 2023.

For the three months ended September 30, 2024, Asia/Pacific net sales decreased by $1.0 million, or 5.1%, to $18.6 million, as compared to $19.6 million for the same period in 2023 .

T he number of active independent associates and preferred customers decreased by 9.2%, which was partially offset by a 4.5 % increase in r evenue per active independent associate and preferred custom er.

Foreign currency exchange had the effect of decreasing revenue by $0.4 million for the three months ended September 30, 2024, as compared to the same period in 2023.

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

For the nine months ended September 30, 2024, Asia/Pacific net sales decreased by $8.4 million, or 14%, to $51.6 million, as compared to $60.0 million for the same period in 2023 .

A challenging economic environment in Korea led to a 5.3% decrease in r evenue per active independent associate and preferred customer , which was partially offset by a 1.5% increase in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of decreasing revenue by $2.0 million for the nine months ended September 30, 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 June 30, 2024, EMEA net sales decreased by $0.4 million, or 14.8%, to $2.3 million, as compared to $2.7 million for the same period in 2023.

The decrease was primarily due to a 10.1% decrease in the number of active independent associates and preferred customers and a 5.2% decrease in revenue per active independent associate and preferred customer.

Foreign currency exchange had a minimal effect on revenue for the three months ended June 30, 2024 as compared to the same period in 2023.

For the six months ended June 30, 2024, EMEA net sales decreased by $0.8 million, or 15.4%, to $4.4 million, as compared to $5.2 million for the same period in 2023.

The decrease was primarily due to a 11.8 % decrease in the number of active independent associates and preferred customers and a 5.9% decrease i n revenue per active independent associate and preferred customer.

Foreign currency exchange had the effect of decreasing revenue by $0.1 million for the six months ended June 30, 2024 as compared to the same period in 2023.

For the three months ended September 30, 2024, EMEA net sales increased by $0.2 million, or 8.7%, to $2.5 million, as compared to $2.3 million for the same period in 2023.

The increase was primarily due to a 16.2% increase in revenue per active independent associate and preferred customer, which was partially offset by a 6.4% decrease in the number of active independent associates and preferred customers.

Foreign currency exchange had the effect of in creasing revenue by $0.1 million for the three months ended September 30, 2024 as compared to the same period in 2023.

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

Our sales mix for the three and six months ended June 30, was as follows (in millions, except percentages):

Three-month period ended June 30, 2024 June 30, 2023 Constant $ Change

For the nine months ended September 30, 2024, EMEA net sales decreased by $0.6 million, or 8%, to $6.9 million, as compared to $7.5 million for the same period in 2023.

The decrease was primarily due to a 10.6 % decrease in the number of active independent associates and preferred customers and a 1.7% decrease i n revenue per active independent associate and preferred customer.

Foreign currency exchange had a minimal effect on revenue for the three months ended September 30, 2024 as compared to the same period in 2023.

Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages):

Three-month period ended September 30, 2024 September 30, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

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Total $ 31.7 $ 0.5 $ 32.2 $ 32.6 $ (0.4) (1.2) %

Six-month period ended June 30, 2024 June 30, 2023 Constant $ Change

Nine-month period ended September 30, 2024 September 30, 2023 Constant $ Change

Total $ Translation Adjustment Non-GAAP

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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 June 30, 2024 decreased by $4.7 million, or 15.2%, as compared to the same period in 2023.

On a Constant dollar basis, product sales for the three months ended June 30, 2024 decreased $4.0 million, or 12.9%, as compared to the same period in 2023.

The decrease in product sales for the three months ended June 30, 2024 reflects a 7.9% decrease in the number of orders processed and a decrease in the average order value to $166, as compared to $173 for the same period in 2023.

Product sales for the six months ended June 30, 2024 decreased by $8.7 million, or 13.8%, as compared to the same period in 2023.

On a Constant dollar basis, product sales for the six months ended June 30, 2024 declined $7.3 million, or 11.6%, as compared to the same period in 2023.

The decrease in product sales for the six months ended June 30, 2024 reflects a 7.5% decrease in the number of orders processed and a decrease in the average order value to $167, as compared to $179 for the same period in 2023.

Product sales for the three months ended September 30, 2024 decreased by $0.9 million, or 2.9%, as compared to the same period in 2023.

On a Constant dollar basis, product sales for the three months ended September 30, 2024 decreased $0.5 million, or 1.6%, as compared to the same period in 2023.

The decrease in product sales for the three months ended September 30, 2024 reflects a 6.4% decrease in the number of orders processed and a decrease in the average order value to $178, as compared to $177 for the same period in 2023.

The Company experienced supply chain issues with some products during 2024, which led to stock outs of certain products and affected the timing of certain key product promotions during the year.

Product sales for the nine months ended September 30, 2024 decreased by $9.6 million, or 10.2%, as compared to the same period in 2023.

On a Constant dollar basis, product sales for the nine months ended September 30, 2024 declined $7.8 million, or 8.3%, as compared to the same period in 2023.

The decrease in product sales for the nine months ended September 30, 2024 reflects a 7.2% decrease in the number of orders processed and a decrease in the average order value to $171, as compared to $178 for the same period in 2023.

Pack sales, Associate Fees and Recruiting

Recruitment of new independent associates and preferred customers decreased by 13.6% to 16,690 in the second quarter of 2024 from 19,309 in the second quarter of 2023.We attribute the lower number of orders processed in the three months ended June 30, 2024 to a combination of the lower number of new independent associates and preferred customers recruited during the period.

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 June 30, 2024 and 2023 were as follows:

Recruitment of new independent associates and preferred customers decreased by 28.1% to 16,741 in the third quarter of 2024, as compared with 23,296 in the third quarter of 2023.

We attribute the lower number of orders processed in the three months ended September 30, 2024 to a combination of the lower number of new independent associates and preferred customers recruited during the period.

Pack sales and associate fees are closely related to recruiting and retention of business-building associates.

New 68,000 50.0 % 78,000 53.4 %

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

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

The Company collected associate fees in lieu of pack sales within the United States, Canada, South Africa, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, the Netherlands, Norway, Spain, Sweden the United Kingdom.

Japan, Australia, New Zealand, Singapore, Hong Kong, and Taiwan.

In the Republic of Korea and Mexico, packs may still be purchased by our associates who wish to build a Mannatech business.

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Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials.

We also do not collect associate fees or sell packs in our non-direct selling business in mainland China.

The decline in pack sales occurred principally in Korea.

We do not collect associate fees or sell packs in our non-direct selling business in mainland China.

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 June 30, 2024 and 2023, other sales were $0.4 million and $0.2 million, respectively.

For the six months ended June 30, 2024 and 2023, other sales were $0.8 million and $0.3 million, respectively.

For the three months ended June 30, 2024, gross profit decreased by $4.2 million, or 16.5%, to $21.4 million, as compared to $25.6 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 June 30, 2024, gross profit as a percentage of net sales decreased to 77.1%, as compared to 78.5% for the same period in 2023.

Some of the increase in costs were related to increased freight costs related to back ordered items and running some sales promotions on products thereby reducing our margin.

For the six months ended June 30, 2024, gross profit decreased by $7.8 million, or 14.9%, to $44.5 million, as compared to $52.3 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 six months ended June 30, 2024, gross profit as a percentage of net sales decreased to 77.8%, as compared to 78.4% for the same period in 2023.

For the three months ended September 30, 2024 and 2023, other sales were $0.3 million and $0.4 million, respectively.

For the nine months ended September 30, 2024 and 2023, other sales were $1.2 million and $0.7 million, respectively.

For the three months ended September 30, 2024, gross profit decreased by $2.3 million, or 8.9%, to $23.6 million, as compared to $25.9 million for the same period in 2023.

For the three months ended September 30, 2024, gross profit as a percentage of net sales decreased to 74.5%, as compared to 79.6% for the same period in 2023.

The decrease in gross profit in dollar terms is principally due to increased product costs, including inventory markdowns, and increased freight costs.

The timing of certain sales promotions also reduced gross profit as a percentage of net sales during the quarter, compared with the same period in 2023.

For the nine months ended September 30, 2024, gross profit decreased by $10.1 million, or 12.9%, to $68.1 million, as compared to $78.2 million for the same period in 2023.

The decrease in gross profit in dollar terms is principally due to increased costs related to supply chain challenges, including increased product costs and increased freight costs.

For the nine months ended September 30, 2024, gross profit as a percentage of net sales decreased to 76.6%, as compared to 78.8% for the same period in 2023.

Commissions and Incentives

Commission expense for the three months ended June 30, 2024 decreased by 12.5%, or $1.6 million, to $11.1 million, as compared to $12.7 million for the same period in 2023.

Commission expense for the three months ended September 30, 2024 decreased by 2.0%, or $0.2 million, to $12.2 million, as compared to $12.4 million for the same period in 2023.

Commissions are earned on sales.

Commission expense in dollar terms decreased during the three months ended June 30, 2024 primarily due to a decline in our sales.

For the three months ended June 30, 2024, commissions as a percentage of net sales increased to 40.0% from 38.9% for the same period in 2023.

The increase in commissions was due partially to running promotions on our products.

Commission expense for the six months ended June 30, 2024 decreased by 12.9%, or $3.3 million, to $22.3 million, as compared to $25.6 million for the same period in 2023.

Commission expense in dollar terms decreased during the three months ended September 30, 2024 primarily due to a decline in our sales.

For the three months ended September 30, 2024, commissions as a percentage of net sales remained constant at 38.3%.

Commission expense for the nine months ended September 30, 2024 decreased by 9.2%, or $3.5 million, to $34.5 million, as compared to $38.0 million for the same period in 2023.

Commissions are earned on sales.

Commission expense in dollar terms decreased during the six months ended June 30, 2024 primarily due to a decline in our sales.

For the six months ended June 30, 2024, commissions as a percentage of net sales increased to 39.0% from 38.4% for the same period in 2023, due in part to the product promotions run in the quarter ended June 30, 2024.

Incentive costs for the three months ended June 30, 2024 decreased to $0.6 million, as compared to $0.8 million for the same period in 2023 .

For the three months ended June 30, 2024, incentives as a percentage of net sales decreased to 2.0% from 2.4% for the same period in 2023.

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

Incentive costs for the six months ended June 30, 2024 decreased to $1.1 million, as compared to $1.4 million for the same period in 2023 .

For the six months ended June 30, 2024, incentives as a percentage of net sales decreased to 1.8% from 2.1% for the same period in 2023.

Commission expense in dollar terms decreased during the nine months ended September 30, 2024 primarily due to a decline in our sales.

For the nine months ended September 30, 2024, commissions as a percentage of net sales increased to 38.8% from 38.3% for the same period in 2023.

Incentive costs for the three months ended September 30, 2024 and 2023 remained constant at $0.7 million.

For the three months ended September 30, 2024, incentives as a percentage of net sales remained constant at 2.3%.

Incentive costs for the nine months ended September 30, 2024 decreased to $1.8 million, as compared to $2.2 million for the same period in 2023 .

For the nine months ended September 30, 2024, incentives as a percentage of net sales decreased to 2.0% from 2.2% for the same period in 2023.

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

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and other miscellaneous operating expenses.

For the three months ended June 30, 2024, selling and administrative expenses decreased by $2.2 million, or 17.0%, to $10.9 million, as compared to $13.1 million for the same period in 2023.

The decrease in selling and administrative expenses was the result of a $0.9 million reduction in payroll costs, a $0.7 million decrease in legal and consulting fees, a $0.3 million decrease in travel and entertainment costs, a $0.2 million decrease in marketing costs and a $0.1 million decrease in office expenses.

Selling and administrative expenses, as a percentage of net sales, for the three months ended June 30, 2024 decreased to 39.1% from 40.1% for the same period in 2023.

For the six months ended June 30, 2024, selling and administrative expenses decreased by $4.0 million, or 15.9%, to $21.5 million, as compared to $25.5 million for the same period in 2023.

The decrease in selling and administrative expenses was the result of judicious cost reductions, including a $1.4 million decrease in payroll costs and a $1.3 million decrease in consulting fees.

Selling and administrative expenses, as a percentage of net sales, for the six months ended June 30, 2024 decreased to 37.5% from 38.2% for the same period in 2023.

For the three months ended September 30, 2024, selling and administrative expenses decreased by $2.8 million, or 21.8%, to $9.8 million, as compared to $12.6 million for the same period in 2023.

The decrease in selling and administrative expenses was the result of a $0.9 million reduction in payroll costs, a $0.6 million decrease in marketing costs, a $0.6 million decrease to bad debt, a $0.3 million decrease in professional and consulting fees, a $0.2 million decrease in office expenses, $0.1 million decrease in depreciation expense and a $0.1 million decrease in travel and entertainment costs.

Selling and administrative expenses, as a percentage of net sales, for the three months ended September 30, 2024 decreased to 31.0% from 38.6% for the same period in 2023.

For the nine months ended September 30, 2024, selling and administrative expenses decreased by $6.8 million, or 17.8%, to $31.3 million, as compared to $38.1 million for the same period in 2023.

The decrease in selling and administrative expenses was the result of judicious cost reductions, including a $2.3 million decrease in payroll costs, a $1.7 million decrease in professional and consulting fees, a $0.9 million decrease in marketing costs, a $0.6 million decrease to bad debt, a $0.5 million decrease in costs of office space, a $0.4 million decrease in travel and entertainment costs, a $0.2 million decrease in contract labor costs and a $0.2 million decrease in credit card fees.

Selling and administrative expenses, as a percentage of net sales, for the nine months ended September 30, 2024 decreased to 35.2% from 38.4% for the same period in 2023.

Other Income (Expense), Net

Due to the strengthening of the U.S.

Dollar foreign exchange gains were $1.1 million and $0.2 million for the three months ended June 30, 2024 and 2023, respectively.

Foreign exchange gains were $2.0 million and $0.5 million for the six months ended June 30, 2024 and 2023, respectively.

Foreign exchange losses were $1.5 million for the three months ended September 30, 2024.

Foreign exchange gains were $0.3 million for the three months ended September 30, 2023.

Foreign exchange gains were $0.5 million and $0.8 million for the nine months ended September 30, 2024 and 2023, respectively.

Income Tax (Provision) Benefit

Income tax expense was $0.5 million for the three months ended June 30, 2024 as compared to $0.3 million in the same period last year.

Income tax benefit was $0.4 million for the three months ended September 30, 2024 as compared to income tax expense of $0.5 million in the same period last year.

Income tax (provision) or benefit includes 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 six months ended June 30:

Our statutory income tax rates for key jurisdictions are as follows, for the nine months ended September 30:

Country 2024 2023

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As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction.

The provision for income taxes is directly related to our profitability and changes in the taxable income among countries of operation.

For the three and six months ended June 30, 2024, the Company’s effective tax rate was (277.4)% and 74.8%, respectively.

For the three and six months ended June 30, 2023, the Company’s effective tax rate was (20.8)% and (228.0)%, respectively.

The effective tax rates for the three and six months ended June 30, 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.

The provision for income taxes is directly related to our profitability and changes in the taxable income across countries of operation.

For the three and nine months ended September 30, 2024, the Company’s effective tax rate was 83.9%

and 71.1%, respectively.

For the three and nine months ended September 30, 2023, the Company’s effective tax rate was 43.0% and 166.1%, respectively.

The effective tax rates for the three and nine months ended September 30, 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 June 30, 2024, our cash and cash equivalents increased by 18.9%, or $1.5 million, to $9.2 million from $7.7 million as of December 31, 2023.

As of September 30, 2024, our cash and cash equivalents increased by 57.2%, or $4.5 million, to $12.2 million from $7.7 million as of December 31, 2023.

The Company is required to restrict cash for:

(i) direct selling insurance premiums and credit card sales in the Republic of Korea;

(ii) reserve on credit card sales in the United States and Canada;

and (iii) the Australia building lease collateral.

The current portion of restricted cash balances was $0.9 million at each of June 30, 2024 and December 31, 2023.

The long-term portion of restricted cash balances was $0.7 million at each of June 30, 2024 and December 31, 2023.

(ii) reserves related to credit card sales in the United States and Canada;

and (iii) collateral for a building lease in Australia.

The current portion of restricted cash balances was $0.9 million at each of September 30, 2024 and December 31, 2023.

The long-term portion of restricted cash balances was $0.6 million and $0.7 million at September 30, 2024 and December 31, 2023, respectively.

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

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Working capital represents total current assets less total current liabilities.

At June 30, 2024 and December 31, 2023, our working capital was $4.0 million and $1.9 million , respectively.

At September 30, 2024 and December 31, 2023, our working capital was $5.7 million and $1.9 million , respectively.

Net Cash Flows

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

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

Provided by (Used in):

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Operating Activities

Operating activities used $0.8 million cash for the six months ended June 30, 2024 as compared to a use of $1.3 million cash in the same period in 2023.

The improvement is due to reduced operating costs and management of inventory carrying balances, which yielded net income of $0.6 million for the six months ended June 30, 2024.

Operating activities provided $2.5 million cash for the nine months ended September 30, 2024 as compared to a use of $1.0 million cash in the same period in 2023.

The improvement is due to reduced operating costs and management of inventory carrying balances over the nine months ended September 30, 2024.

Investing Activities

For the six months ended June 30, 2024 and 2023, we invested cash of $0.1 million and $0.4 million, respectively, principally for back-office software projects, reported as property and equipment.

For the nine months ended September 30, 2024 and 2023, we invested cash of $0.4 million and $0.5 million, respectively, principally for back-office software projects, reported as property and equipment.

Financing Activities

For the six months ended June 30, 2024 our financing activities provided cash of $3.1 million.

For the nine months ended September 30, 2024 our financing activities provided cash of $2.9 million.

We received $3.6 million from the issuance of notes payable (see Note 4) and we used $0.7 million in the repayment of finance lease obligations.

For the six months ended June 30, 2023 our financing activities used $1.3 million.

For the six months ended June 30, 2023, we used $0.8 million in payments of dividends to shareholders, $0.4 million in the repayment of finance lease obligations and $0.1 million in the repurchase of common stock.

For the nine months ended September 30, 2023 our financing activities used $1.6 million.

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.

General Liquidity and Cash Flows

Short Term Liquidity

As of June 30, 2024, our cash and cash equivalents was $9.2 million.

As of September 30, 2024, our cash and cash equivalents was $12.2 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.

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

At June 30, 2024, we have one supply agreement which was amended on April 18, 2024, that requires the Company to purchase an aggregate of $2.6 million through 2025, with no purchase commitments thereafter.

At September 30, 2024, we have one supply agreement which was amended on April 18, 2024, that requires the Company to purchase an aggregate of $1.8 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.

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These operating lease liabilities represent our minimum future payment obligations on operating leases, including imputed interest.

At June 30, 2024, our operating lease liabilities were $3.7 million, of which the current portion of $1.7 million is presented as a component of Accrued expenses and $2.0 million is presented as Operating lease liabilities excluding current portion on our Condensed Consolidated Balance Sheets.

At September 30, 2024, our operating lease liabilities were $3.3 million, of which $1.5 million is presented as the current portion and $1.8 million is presented as Operating lease liabilities excluding current portion on our Condensed Consolidated Balance Sheets.

We also have finance lease liabilities of $1.0 million and lease restoration liabilities of $0.4 million.

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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.

However, if our reorganization plans are not successful, or if we experience further or unexpected disruption in our supply chain, and/or potential decreases in consumer demands, our sales and our overall liquidity in the next twelve months could be negatively impacted.

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

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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 an d 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, long-lived fixed assets and capitalization of internal-use software development costs, reserve for uncertain income tax positions an d tax valuation allowances, revenue recognition, sales returns, and deferred revenues, accounting for stock-based compensation, and contingencies and litigation.

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

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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 significant accounting policies and critical estimates as of June 30, 2024.

We have identified the following applicable significant accounting policies and critical estimates as of September 30, 2024.

Inventory Reserves

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Tax Valuation Allowances

As of June 30, 2024, there was nothing recorded in other long-term liabilities on our condensed consolidated balance sheet related to uncertain income tax positions.

As of September 30, 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.

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.

the quarter ended September 30, 2024 the Company changed its shipping terms with customers such that ownership transfers upon delivery to the freight carrier, satisfying the Company's performance obligation.

Previously, the Company's shipping terms were FOB destination, so the Company recognized revenue upon delivery of the product to the customer.

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

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

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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