MANNATECH INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist in the understanding of our consolidated financial position and results of operations for the three and nine months ended September 30, 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. Refer to the Non-GAAP Financial Measures section herein for a description of how such Constant dollar measures are determined. COMPANY OVERVIEW The Company is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high quality, proprietary nutritional supplements, topical and skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in twenty-five countries which we group into three regions: (i) the Americas (the United States, Canada and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, 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 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 . New pack sales and the receipt of new associate fees in connection with new positions in our network are leading indicators for the long-term success of our business. New associate or preferred customer positions are created in our network when our associate fees are paid, or packs and products are purchased for the first time under a new account. We 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 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; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure. Our subsidiary in China, Meitai, is currently operating as a traditional retailer under a cross-border e-commerce model. Meitai cannot legally conduct a direct selling business in China unless it acquires a direct selling license in China. The Company maintains a corporate website at www.mannatech.com. Overview of Operating Results 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. 23 RESULTS OF OPERATIONS 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 2023 to 2024 Total dollars % of net sales Total dollars % of net sales Dollar Percentage Net sales $ 31,725 100.0 % $ 32,553 100.0 % $ (828) (2.5) % Cost of sales 8,105 25.5 % 6,625 20.4 % 1,480 22.3 % Gross profit 23,620 74.5 % 25,928 79.6 % (2,308) (8.9) % Operating expenses: Commissions and incentives 12,893 40.6 % 13,178 40.5 % (285) (2.2) % Selling and administrative expenses 9,840 31.0 % 12,578 38.6 % (2,738) (21.8) % Total operating expenses 22,733 71.7 % 25,756 79.1 % (3,023) (11.7) % 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 (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 2022 to 2023 Total dollars % of net sales Total dollars % of net sales Dollar Percentage Net sales $ 88,858 100.0 % $ 99,261 100.0 % $ (10,403) (10.5) % Cost of sales 20,763 23.4 % 21,042 21.2 % (279) (1.3) % Gross profit 68,095 76.6 % 78,219 78.8 % (10,124) (12.9) % Operating expenses: Commissions and incentives 36,237 40.8 % 40,200 40.5 % (3,963) (9.9) % Selling and administrative expenses 31,293 35.2 % 38,088 38.4 % (6,795) (17.8) % Total operating expenses 67,530 76.0 % 78,288 78.9 % (10,758) (13.7) % 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) % Income before income taxes 864 1.0 % 731 0.7 % 133 18.2 % Income tax provision (636) (0.7) % (1,214) (1.2) % 578 (47.6) % Net income (loss) $ 228 0.3 % $ (483) (0.5) % $ 711 (147.2) % 24 Non-GAAP Financial Measures To supplement our financial results presented in accordance with GAAP, we disclose operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: Net Sales, Gross Profit, and Income from Operations. We refer to these adjusted financial measures as Constant dollar items, which are non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends and our operating results. To exclude the impact of changes due to the translation of foreign currencies into U.S. 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. 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 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 GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Net sales $ 31.7 $ 0.5 $ 32.2 $ 32.6 $ (0.4) (1.2) % Gross profit 23.6 0.4 24.0 25.9 (1.9) (7.3) % 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 GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Net sales $ 88.9 $ 1.9 $ 90.8 $ 99.3 $ (8.5) (8.6) % Gross profit 68.1 1.5 69.6 78.2 (8.6) (11.0) % 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 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 September 30, 2024 Three Months Ended September 30, 2023 Americas $ 10.6 33.4 % $ 10.7 32.8 % Asia/Pacific 18.6 58.7 % 19.6 60.1 % EMEA 2.5 7.9 % 2.3 7.1 % Total $ 31.7 100.0 % $ 32.6 100.0 % 25 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 % Asia/Pacific 51.6 58.0 % 60.0 60.4 % EMEA 6.9 7.8 % 7.5 7.6 % Total $ 88.9 100.0 % $ 99.3 100.0 % 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 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. 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. Sales Mix 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 GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Product $ 30.1 $ 0.4 $ 30.5 $ 31.0 $ (0.5) (1.6) % Pack sales and associate fees 1.3 — 1.3 1.2 0.1 8.3 % Other 0.3 0.1 0.4 0.4 — — % Total $ 31.7 $ 0.5 $ 32.2 $ 32.6 $ (0.4) (1.2) % 26 Nine-month period ended September 30, 2024 September 30, 2023 Constant $ Change GAAP Measure: Total $ Translation Adjustment Non-GAAP Measure: Constant $ GAAP Measure: Total $ Dollar Percent Product $ 84.3 $ 1.8 $ 86.1 $ 93.9 $ (7.8) (8.3) % Pack sales and associate fees 3.4 0.1 3.5 4.7 (1.2) (25.5) % Other 1.2 — 1.2 0.7 0.5 71.4 % Total $ 88.9 $ 1.9 $ 90.8 $ 99.3 $ (8.5) (8.6) % Product Sales 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 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 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. The approximate number of new and continuing active independent associates and preferred customers who purchased our packs or products or paid associate fees during the twelve months ended September 30, 2024 and 2023 were as follows: 2024 2023 New 68,000 50.0 % 78,000 53.4 % Continuing 68,000 50.0 % 68,000 46.6 % Total 136,000 100.0 % 146,000 100.0 % The Company collects associate fees in lieu of selling packs in certain markets. Associate fees are paid annually by new and continuing associates to the Company, which entitle them to earn commissions, benefits and incentives for that year. 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. These packs contain products that are discounted from both the published retail and associate prices. There are several pack options available to our associates. In certain of these markets, pack sales are completed during the final stages of the registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates in these markets can also purchase an upgrade pack, which provides the associate with additional promotional materials. 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. 27 Other Sales Other sales consisted of: (i) sales of promotional materials; (ii) monthly fees collected for the Success Tracker™ and Mannatech+ customized electronic business-building and educational materials, databases and applications; (iii) training and event registration fees; and (iv) a reserve for estimated sales refunds and returns. Promotional materials, training, database applications and business management tools support our independent associates, which in turn helps stimulate product sales. For the three months ended September 30, 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. Gross Profit 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 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 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 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. 28 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; accounting, legal and consulting fees; compensation to our board of directors; warehouse and fulfillment costs; depreciation and amortization; marketing-related expenses; travel and entertainment expenses; credit card processing fees; costs for software maintenance agreements; insurance; charitable contributions; office lease expense; utilities; bad debt; and other miscellaneous operating expenses. 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 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 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 nine months ended September 30: Country 2024 2023 China (1) 25.0 % 25.0 % Hong Kong 16.5 % 16.5 % Japan 34.6 % 34.6 % Republic of Korea 20.9 % 20.9 % United States (2) 22.2 % 22.2 % (1) For 2024, the Company qualified for a reduced tax rate of 5% in China as a Small Low Profit Enterprise. (2) Includes blended state effective rate of 1.2% for 2024 and 2023 in addition to U.S. federal statutory rate of 21%. Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States. We use the recognition and measurement provisions of the FASB ASC Topic 740, Income Taxes (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction. The provision for income taxes is directly related to our profitability and changes in the taxable income across countries of operation. For the three and nine months ended September 30, 2024, the Company’s effective tax rate was 83.9% 29 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. 30 LIQUIDITY AND CAPITAL RESOURCES Cash and Cash Equivalents 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) 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. 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. Working Capital Working capital represents total current assets less total current liabilities. 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 nine months ended September 30 (in millions) : Provided by (Used in): 2024 2023 Operating activities $ 2.5 $ (1.0) Investing activities $ (0.4) $ (0.5) Financing activities $ 2.9 $ (1.6) Operating Activities 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 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 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 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. 31 General Liquidity and Cash Flows Short Term Liquidity 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. On April 23, 2024, the Company entered into unsecured Loan and Promissory Note agreements 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 was 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. We have contractual purchase commitments with certain raw materials suppliers to purchase minimum quantities. 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. These agreements do not require us to purchase any minimum quantities. 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, 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. 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 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. Long Term Liquidity We believe our cash flows from operations should be adequate to fund our normal expected future business operations and possible international expansion costs for the long term. As our primary source of liquidity is from our cash flows from operations, this will be dependent on our ability to maintain or improve revenue as compared to operational expenses. However, if our existing capital resources or cash flows become insufficient to meet anticipated business plans and existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if at all. Our future access to the capital markets may be adversely impacted if we fail to maintain compliance with the Nasdaq Marketplace Rules for the continued listing of our stock. We continuously monitor our compliance with the Nasdaq continued listing rules. 32 OFF-BALANCE SHEET ARRANGEMENTS We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements. CRITICAL ACCOUNTING ESTIMATES Our 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 condensed consolidated financial statements are prepared. Our Audit Committee reviews our significant accounting policies and critical estimates. We continually evaluate and review our policies related to the portrayal of our consolidated financial position and consolidated results of operations that require the application of significant judgment by our management. We also analyze the need for certain estimates, including the need for such items as allowance for 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. 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, 2024. Inventory Reserves Inventory consists of raw materials, finished goods, and promotional materials that are stated at the lower of cost (using standard costs that approximate average costs) or market. We record the amounts charged by the vendors as the costs of inventory. Typically, the net realizable value of our inventory is higher than the aggregate cost. Determination of net realizable value can be complex and, therefore, requires a high degree of judgment. In order for management to make the appropriate determination of net realizable value, the following items are considered: inventory turnover statistics, current selling prices, seasonality factors, consumer demand, regulatory changes, competitive pricing, and performance of similar products. If we determine the carrying value of inventory is in excess of estimated net realizable value, we write down the value of inventory to the estimated net realizable value. We also review inventory for obsolescence in a similar manner and any inventory identified as obsolete is reserved or written off. Our determination of obsolescence is based on assumptions about the demand for our products, product expiration dates, estimated future sales, and general future plans. We monitor actual sales compared to original projections, and if actual sales are less favorable than those originally projected by us, we record an additional inventory reserve or write-down. Historically, our estimates have been close to our actual reported amounts. However, if our estimates regarding inventory obsolescence are inaccurate or consumer demand for our products changes in an unforeseen manner, we may be exposed to additional material losses or gains in excess of our established estimated inventory reserves. Tax Valuation Allowances 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. We base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not” be sustained in an income tax audit. We are also subject to periodic audits from multiple domestic and foreign tax authorities related to income tax and other forms of taxation. These audits examine our tax positions, timing of income and deductions, and allocation procedures across multiple jurisdictions. Depending on the nature of the tax issue, we could be subject to audit over several years. There are ongoing income tax audits in various international jurisdictions that we believe are not material to our financial statements. Revenue Recognition and Deferred Commissions Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. During 33 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. Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (1) the sales of the product and (2) the loyalty program. For these contracts, we account for each of these obligations separately as they are each distinct. The transaction price is allocated between the product sale and the loyalty program on a relative standalone selling price basis. Sales placed through a one-time order contain only the first performance obligation noted above – the sale of the product. We provide associates with access to a complimentary three-month package for the Success Tracker™ and Mannatech+ online business tools with the first payment of an associate fee. The first payment of an associate fee contains three performance obligations: (1) providing new associates with the eligibility to earn commissions, bonuses and incentives for twelve months, (2) three months of complimentary access to utilize the Success Tracker™ online tool, and (3) three months of complimentary access to utilize the Mannatech+ online business tool. The transaction price is allocated between the three performance obligations on a relative standalone selling price basis. Associates do not have complimentary access to online business tools after the first contractual period. With regard to both of the aforementioned contracts, we determine the standalone selling prices by using observable inputs, which include our standard published price lists. Product Return Policy We stand behind our packs and products and believe we offer a reasonable and industry-standard product return policy to all of our customers. We do not resell returned products. Refunds are not processed until proper approval is obtained. All refunds must be processed and returned in the same form of payment that was originally used in the sale. Each country in which we operate has specific product return guidelines. However, we allow our associates and preferred customers to exchange products as long as the products are unopened and in good condition. Our return policies for our retail customers and our associates and preferred customers are as follows: • Retail Customer Product Return Policy. This policy allows a retail customer to return any of our products to the original associate who sold the product and receive a full cash refund from the associate for the first 180 days following the product’s purchase if located in the United States and Canada, and for the first 90 days following the product’s purchase in other countries where we sell our products. The associate may then return or exchange the product based on the associate product return policy. • Associate and Preferred Customer Product Return Policy. This policy allows the associate or preferred customer to return an order within one year of the purchase date upon terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% restocking fee. We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies in the United States and Canada, only for the first 180 days following the product’s purchase and applies in other countries where we sell our products for the first 90 days following the product’s purchase; however, any commissions earned by an associate will be deducted from the refund. If we discover abuse of the refund policy, we may terminate the associate’s or preferred customer’s account. Historically, sales returns estimates have not materially deviated from actual sales returns, as the majority of our customers who return merchandise do so within the first 90 days after the original sale. Based upon our return policies and historical experience, we estimate a sales return reserve for expected sales refunds over a rolling six-month period. If actual results differ from our estimated sales returns reserves due to various factors, the amount of revenue recorded each period could be materially affected. Historically, our sales returns have not materially changed through the years and have averaged 0.5% or less of our gross sales. 34