MANNATECH INC

Previous wording

The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the two years ended December 31, 2023 and 2022. This discussion should be read in conjunction with “Item 15.1 – Consolidated Financial Statements” beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis. Refer to the Non-GAAP Financial Measure section herein for a description of how Constant dollar (“Constant dollar”) growth rate (a Non-GAAP financial metric) is determined.

Current wording

The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of years ended December 31, 2024 and 2023. This discussion should be read in conjunction with “Item 15.1 – Consolidated Financial Statements” beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis. Refer to the Non-GAAP Financial Measure section herein for a description of how Constant dollar (“Constant dollar”) growth rate (a Non-GAAP financial metric) is determined.

Previous wording

Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high quality, proprietary nutritional supplements, skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong, and China). We also ship our products to customers in the following countries: Belgium, France, Greece, Italy, Luxembourg, and Poland.

Current wording

Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high quality, proprietary nutritional supplements, skin care and anti-aging products, and weight-management products that target optimal health and wellness. We currently sell our products in three regions: (i) the Americas (the United States, Canada and Mexico); (ii) Europe/the Middle East/Africa (“EMEA”) (Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, the Netherlands, Norway, South Africa, Spain, Sweden and the United Kingdom); and (iii) Asia/Pacific (Australia, Japan, New Zealand, the Republic of Korea, Singapore, Thailand, Taiwan, Hong Kong, 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.

Previous wording

We conduct our business as a single reporting segment and primarily sell our products through a network of approximately 145,000 active associates and preferred customer positions held by individuals that purchased our products and/or packs or paid associate fees during the last 12 months, who we refer to asactive 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 products and packs are purchased for the first time under a new account. We review and analyze net sales by geographical location and by products and packs on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.

Current wording

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 133,000 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 ascurrent 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.

Previous wording

Because we sell our products principally through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of active associates and preferred customers that occupy sales or purchasing positions in our network; entry into new markets and growth of existing markets; 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.

Current wording

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.

Previous wording

Consolidated net sales for the year ended December 31, 2023 was $132.0 million, as compared to $137.2 million for the year ended December 31, 2022. Net sales decreased $5.2 million, or 3.8%, for 2023, as compared to 2022. Our 2023 net sales declined $2.9 million, or 2.1%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.3 million decrease in GAAP net sales as compared to 2022.

Current wording

Consolidated net sales for the year ended December 31, 2024 was$117.9 million, as compared to$132.0 million for the year ended December 31, 2023. Net sales decreased $14.1 million, or 10.7%, for 2024, as compared to 2023. Our 2024 net sales declined $11.4 million, or 8.6%, on a Constant dollar basis (see Non-GAAP Financial Measures, below), and unfavorable foreign exchange caused a $2.7 million decrease in GAAP net sales as compared to 2023.

Previous wording

We incurred an operating loss of $1.0 million for the year ended December 31, 2023, as compared to $0.4 million for the same period last year. Our 2023 operating loss, on a Constant dollar basis (see Non-GAAP Financial Measures, below), was $0.4 million.

Current wording

We generated operating income of$1.4 million for the year ended December 31, 2024, as compared to an operating loss of $1.0 million for the same period last year. Our 2024 operating income, on a Constant dollar basis (see Non-GAAP Financial Measures, below), was $2.2 million.

Previous wording

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), the table below summarizes operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: Net Sales, Gross Profit, and Loss from Operations. We refer to these adjusted financial measures as Constant dollar items, which are Non-GAAP financial measures. We believe these measures provide investors an additional perspective on trends 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(in millions, except percentages).

Current wording

To supplement our financial results presented in accordance with generally accepted accounting principles in the United States ("GAAP"), the table below summarizes operating results that have been adjusted to exclude the impact of changes due to the translation of foreign currencies into U.S. dollars, including changes in: Net Sales, Gross Profit, and Income (Loss) from Operations. 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

Previous wording

Net sales decreased by $5.2 million, or 3.8%, for 2023, as compared to 2022. For the year ended December 31, 2023, our operations outside of the Americas accounted for 67.6% of our consolidated net sales, as compared to 69.7% in 2022.

Current wording

For the years ended December 31, 2024, our operations outside of the Americas accounted for 66.3% of our consolidated net sales, as compared to 67.6% in 2023.

Previous wording

Sales for the Americas increased by $1.2 million, or 2.9%, to $42.8 million for 2023 as compared to $41.6 million for the same period in 2022. This increase was primarily due to a 4.4% increase in revenue per active independent associate and preferred customer, which was partially offset bya 1.4% decline in the number of active independent associates andpreferred customers. Sales in the Americas includes the Mexico region. As a result of the strengthening of the Mexican Peso in 2023, foreign currency exchange had the effect of increasing revenue by $0.5 million for the year ended December 31, 2023, as compared to the same period in 2022.

Current wording

Sales for the Americas decreased by $3.1 million, or 7.2%, to $39.7 million for 2024 as compared to $42.8 million for the same period in 2023. This decrease was primarily due to a 8.6% decline in the number of active independent associates andpreferred customers, which was partially offset by a 1.5% increase in revenue per active independent associate and preferred customer. Sales in the Americas includes the Mexico region. As a result of the weakening of the Mexican Peso in 2024, foreign currency exchange had the effect of decreasing revenue by $0.1 million for the year ended December 31, 2024, as compared to the same period in 2023.

Previous wording

During 2023, Asia/Pacific sales decreased by $4.4 million, or 5.3%, to $79.4 million as compared to $83.8 million for 2022. Foreign currency exchange had the effect of decreasing revenue in 2023 by $1.9 million, as compared to the same period in 2022. The currency impact is primarily due to the weakening of the Korean Won, Japanese Yen and Australian Dollar. In addition, net sales in the Asia/Pacific region was negatively impacted by a 12.2% decrease in revenue per active independent associate and preferred customer, which was partially due to the foreign exchange rate. Offsetting these declines, the number of active independent associates and preferred customers in the Asia/Pacific region increased 7.9%in 2023 as compared to 2022.

Current wording

During 2024, Asia/Pacific sales decreased by $10.4 million, or 13.1%, to $69.0 million as compared to $79.4 million for 2023. Foreign currency exchange had the effect of decreasing revenue in 2024 by $2.7 million, as compared to the same period in 2023. The currency impact is primarily due to the weakening of the Korean Won and Japanese Yen. In addition, net sales in the Asia/Pacific region was negatively impacted by a 4.5% decrease in revenue per active independent associate and preferred customer. The number of active independent associates and preferred customers in the Asia/Pacific region decreased 9.0%in 2024 as compared to 2023.

Previous wording

For the year ended December 31, 2023, EMEA sales decreased by $2.0 million, or 16.9%, to $9.8 million as compared to $11.8 million for 2022. This decrease was primarily due to a 14.5% decrease in the number of active independent associates and preferred customers, and a 2.9% decrease in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of decreasing revenue by $0.9 million for the year ended December 31, 2023, as compared to the same period in 2022. The currency impact is primarily due to the weakening of the South African Rand.

Current wording

For the year ended December 31, 2024, EMEA sales decreased by $0.6 million, or 6.1%, to $9.2 million as compared to $9.8 million for 2023. This decrease was primarily due to a 6.9% decrease in the number of active independent associates and preferred customers, which was partially offset by a 0.9% increase in revenue per active independent associate and preferred customer. Foreign currency exchange had the effect of increasing revenue by $0.1 million for the year ended December 31, 2024, as compared to the same period in 2023. The currency impact is primarily due to the strengthening of the South African Rand and British Pound.

Previous wording

Our product sales consist primarily of sales made to our independent associates and preferred customers at published wholesale prices. Product sales for the year ended December 31, 2023 decreased by $4.9 million, or 3.8%, to $125.3 million, as compared to $130.2 million for the same period in 2022. On a constant dollar basis, product sales in 2023 decreased $2.7 million, or 2.1%, as compared to 2022. The decrease in product sales in 2023 reflects a 7.2% decrease in the number of orders processed, partially offset by an increase in the average order value of $180, as compared to $175 for the same period in 2022.

Current wording

Our product sales consist primarily of sales made to our independent associates and preferred customers at published wholesale prices. Product sales for the year ended December 31, 2024 decreased by $13.0 million, or 10.4%, to $112.3 million, as compared to $125.3 million for the same period in 2023. On a constant dollar basis, product sales in 2024 decreased $10.5 million, or 8.4%, as compared to 2023. The decrease in product sales in 2024 reflects a 7.2% decrease in the number of orders processed and a decrease in the average order value of $172, as compared to $180 for the same period in 2023.

Previous wording

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

Current wording

For the years ended December 31, 2024 and 2023, other sales were $1.5 million and $1.1 million, respectively.

Previous wording

For the year ended December 31, 2023, gross profit decreased by $1.3 million, or 1.2%, to $102.9 million, as compared to $104.1 million for the same period in 2022. The decrease in gross profit in dollar terms is principally due to the decline in sales. Gross profit as a percentage of net sales increased to 78.0% for 2023, as compared to 75.9% for 2022, largely due to reduced costs of freight and shipping and other supply chain initiatives, partially offset by certain raw materials price increases.

Current wording

For the year ended December 31, 2024, gross profit decreased by $11.4 million, or 11.1%, to $91.5 million, as compared to $102.9 million for the same period in 2023. The decrease in gross profit in dollar terms is principally due to the decline in sales. Gross profit as a percentage of net sales decreased to 77.6% for 2024, as compared to 78.0% for 2023, largely due to increased costs related to supply chain challenges, including increased product costs and increased freight costs.

Previous wording

Commission expenses decreased $1.5 million, or 2.9%, to $51.0 million, for the year ended December 31, 2023, as compared to $52.5 million for the same period in 2022. Commissions are earned on sales. Commission expense in dollar terms decreased in 2023 primarily due to a decline in our sales in the year. Commissions as a percentage of net sales was 38.6% for the year ended December 31, 2023 and 38.2% for the same period in the prior year.

Current wording

Commission expenses decreased $4.8 million, or 9.4%, to $46.2 million, for the year ended December 31, 2024, as compared to $51.0 million for the same period in 2023. Commissions are earned on sales. Commission expense in dollar terms decreased in 2024 primarily due to a decline in our sales in the year. Commissions as a percentage of net sales was 39.2% for the year ended December 31, 2024 and 38.6% for the same period in the prior year.

Previous wording

Incentive costs decreased for the year ended December 31, 2023 by 13.3%, or $0.4 million, to $2.6 million as compared to $3.0 million for the same period in 2022. The decrease was related to travel incentives in the Americas and Asia/Pacific. The costs of incentives, as a percentage of net sales, decreased to 2.0% for the year ended December 31, 2023, as compared to 2.2% for the same period in 2022.

Current wording

Incentive costs decreased for the year ended December 31, 2024 by 19.2%, or $0.5 million, to $2.1 million as compared to $2.6 million for the same period in 2023. The decrease was related to travel incentives in the Americas and Asia/Pacific. The costs of incentives, as a percentage of net sales, decreased to 1.8% for the year ended December 31, 2024, as compared to 2.0% for the same period in 2023.

Previous wording

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

Current wording

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.

Previous wording

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

Current wording

At December 31, 2024 and 2023, depreciation and amortization expense was $1.5 million and $1.6 million, respectively.

Previous wording

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

Current wording

Primarily due to foreign exchange gains, other income was $2.6 million for the year ended December 31, 2024. At December 31, 2023, other expense was $0.2 million, primarily due to foreign exchange losses.

Previous wording

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

Current wording

(1)Includes blended state effective rate of 1.2% for 2024 and 2023 in addition to the U.S federal statutory rate of 21%.

Previous wording

For each of the years ended December 31, 2023 and 2022, the Company’s effective tax rate was(98.1)% and (837.4)%, respectively. In 2023, the Company’s effective tax rate differed from the statutory rate due to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions. In 2022, the Company's effective rate differed from the statutory rate due to additional taxes assessed as a result of the settlement of the income tax audit in Korea, the Company recording a valuation allowance on U.S. deferred tax assets largely driven by changes in expected earnings mix between jurisdictions and the relative impact of these items on decreased earnings.

Current wording

For the years ended December 31, 2024 and 2023, the Company’s effective tax rate was 33.4% and (98.1)%, respectively. In 2024 and 2023, the Company’s effective tax rate differed from the statutory rate due to the mix of earnings across jurisdictions and the associated valuation allowances recorded on losses in certain jurisdictions.

Previous wording

Cash and cash equivalents was $7.7 million at December 31, 2023, as compared to $13.8 million as of December 31, 2022. The current portion of restricted cash was $0.9 million at December 31, 2023 and 2022. The Company is required to restrict cash for (i) direct selling insurance premiums and credit card sales in the Republic of Korea; (ii) reserve on credit card sales in the United States and Canada; and (iii) Australia building lease collateral. Fluctuations in currency rates produced a decrease of $0.8 million in cash and cash equivalents in 2023.

Current wording

Cash and cash equivalents was $11.4 million at December 31, 2024, as compared to $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) Australia building lease collateral. The current portion of restricted cash was $0.6 million and$0.9 millionat December 31, 2024 and 2023, respectively. The long-term portion of restricted cash was$0.6 million and $0.7 million at December 31, 2024 and 2023, respectively. Fluctuations in currency rates produced a decrease of $0.8 million in cash and cash equivalents in 2024.

Previous wording

Working capital represents total current assets less total current liabilities. At December 31, 2023, our working capital was $1.9 million as compared to $5.1 million at December 31, 2022. The decrease in working capital principally reflects the decrease in our cash balance which was utilized to fund our operations in 2023, as well as pay down our current liabilities and fund financing activities.

Current wording

Working capital represents total current assets less total current liabilities. At December 31, 2024, our working capital was $5.2 million as compared to $1.9 million at December 31, 2023. The increase in working capital principally reflects the increase in our cash balance which was utilized to fund our operations in 2024, as well as pay down our current liabilities and fund financing activities.

Previous wording

For the year ended December 31, 2023 and 2022, we invested $0.7 million and $1.1 million, respectively. During the year ended December 31, 2023, we invested approximately $0.7 million in back-office software projects and equipment, reported as property and equipment. During the year ended December 31, 2022, we invested $1.1 million in computer hardware and software.

Current wording

For the years ended December 31, 2024 and 2023, we invested $0.3 million and $0.7 million, respectively. During the years ended December 31, 2024 and 2023, we invested approximately $0.3 million and $0.7 million in back-office software projects and equipment, reported as property and equipment, respectively.

Previous wording

For the year ended December 31, 2023, we utilized $1.9 million for financing activities as compared to $4.3 million for the same period of 2022. For the year ended December 31, 2023, we used approximately $1.0 million in the repayment of finance lease obligations and other long-term liabilities, $0.7 million in the payment of dividends to shareholders, and $0.2 million in the repurchase of common stock. For the year ended December 31, 2022, we used approximately $0.8 million in the repayment of finance lease obligations and other long-term liabilities, $1.5 million in the payment of dividends to shareholders, and $2.0 million for the repurchase of common stock.

Current wording

For the year ended December 31, 2024, our financing activities provided cash of $2.0 million as compared to a use of cash of $1.9 million for the same period of 2023. During 2024, we received $3.6 million from the issuance of notes payable (see Note 10, Notes Payable)and we used $1.6 million in the repayment of finance lease obligations. For the year ended December 31, 2023, we used approximately $1.0 million in the repayment of finance lease obligations and other long-term liabilities, $0.7 million in the payment of dividends to shareholders, and $0.2 million for the repurchase of common stock.

Previous wording

We believe our existing liquidity and projected cash flows from operations are adequate to fund our normal expected future business operations for the next 12 months. As of December 31, 2023 and 2022, cash and cash equivalents totaled $7.7 million and $13.8 million, respectively. While our cash utilization in 2022 and 2023 has reduced our short-term liquidity, we do not believe the impact will prohibit us from meeting our obligations or from executing our business strategy. See “Item 1A – Risk Factors – Risks Affecting Our Business and Industry - We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.”

Current wording

As of December 31, 2024 and 2023, our cash and cash equivalents totaled $11.4 million and $7.7 million, respectively. 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.

Previous wording

We have contractual purchase commitments with certain raw material suppliers to purchase minimum quantities and to ensure exclusivity of our raw materials and the proprietary nature of our products. At December 31, 2023, we have one supply agreement that requires the Company to purchase an aggregate of $4.2 million through 2024, with no purchase commitments thereafter. We are currently negotiating with the supplier to amend the agreement to meet current demand levels for these materials. We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and help ensure quality control standards. These agreements do not require us to purchaseany minimum quantities. We have no present commitments or agreements with respect to acquisitions or purchases of any manufacturing facilities; however, management from time to time explores the possibility of the benefits of purchasing a raw material manufacturing facility to help control costs of our raw materials and help ensure quality control standards.

Current wording

We have contractual purchase commitments with certain raw material suppliers to purchase minimum quantities. At December 31, 2024, we have one supply agreement which was amended on April 18, 2024, that requires the Company to purchase an aggregate of $1.1 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 purchaseany minimum quantities.

Previous wording

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 December 31, 2023, our operating lease liabilities were $4.3 million, of which $1.7 million was recorded in Accrued expenses and $2.6 million was recorded in Other long-term liabilities. We also have finance lease liabilities of $1.2 million and lease restoration liabilities of $0.4 million.

Current wording

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 December 31, 2024, our operating lease liabilities were $2.8 million, of which $1.2 million is presented as the current portion and $1.6 million is presented as Operating lease liabilities excluding current portion on our Consolidated Balance Sheets. We also have finance lease liabilities of $1.0 million and lease restoration liabilities of $0.3 million.

Previous wording

As our primary source of liquidity has historically been our cash flows from operations, our liquidity is dependent on our ability to maintain and/or continue to improve revenue as compared to our operational expenses. In this regard, our management has established a 2024 business reorganization plan focusing on revenue growth, margin improvement and cost control and reduction. Our current CEO has announced his retirement effective April 1, 2024. However, he has agreed to continue to serve as an advisor to the Company to establish certain programs aimed at increasing our revenues and growing our preferred customer and associate base. Concurrent with the retirement of our existing CEO, our current President and Chief Operating Officer has been promoted to the position of President & CEO. Furthermore, our management has established a plan to improve margin through a price increase, continued focus on supply chain costs, and certain compensation plan adjustments, as well as to reorganize certain functional operations and reduce our fixed selling and administrative overhead.

Current wording

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.

Previous wording

However, if our reorganization plans are not successful, or if we are unable to renegotiate a favorable outcome to our minimum purchase commitment contracts, or if we experience prolonged workforce disruptions, disruption in our supply chain, and/or potential decreases in consumer demands, our sales and our overall liquidity in the next twelve months could be negatively impacted. If our existing capital resources or cash flows become insufficient to meet current business plans, projections, and existing capital requirements, we may be required to raise additional funds, which may not be available on favorable terms, if at all.

Current wording

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.

Previous wording

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

Current wording

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. At December 31, 2024 and 2023, our inventory reserves were$0.6 million and$0.4 million, respectively.

Previous wording

We review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, future management plans, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2023, we maintained a valuation allowance for deferred tax assets arising from our operations of$10.3 million because they did not meet the “more likely than not” criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as of December 31, 2023, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling$1.6 million, which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution.

Current wording

We review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, future management plans, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2024, we maintained a valuation allowance for deferred tax assets arising from our operations of$6.9 million because they did not meet the “more likely than not” criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as of December 31, 2024, we had net deferred tax assets, after valuation allowance and deferred tax liabilities, totaling$1.8 million, which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution.

Previous wording

Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. We recognize revenue from shipped packs and products upon receipt by the customer. We estimate order delivery dates using weighted averages of historical delivery data periodically provided by our freight carriers. 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.

Current wording

Our revenue is derived from sales of individual products and associate fees or, in certain geographic markets, starter packs. Substantially all of our product and pack sales are to associates and preferred customers at published wholesale prices. We record revenue net of any sales taxes and record a reserve for expected sales returns based on historical experience. We recognize revenue from shipped packs and products upon receipt by the customer. During 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 Free on Board ("FOB") destination, so the Company recognized revenue upon delivery of the product to the customer and we recorded the value of orders shipped but not yet delivered to customers as Deferred Revenue on our Consolidated Balance Sheets. Corporate-sponsored event revenue is recognized when the event is held.

Previous wording

Orders placed by associates or preferred customers constitute our contracts. Product sales placed in the form of an automatic order contain two performance obligations: (a) the sale of the product and (b) the loyalty program. The Company's customer loyalty program conveys a material right to the customer to redeem loyalty points for the purchase of products. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. 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.

Current wording

Orders placed by associates or preferred customers constitute our contracts with customers. Product sales placed in the form of an automatic order contain two performance obligations: (a) the sale of the product and (b) the loyalty program. The Company's customer loyalty program conveys a material right to the customer to redeem loyalty points for the purchase of products. For these contracts, the Company accounts for each of these obligations separately as they are each distinct. 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 delivery of the product.

Previous wording

•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 voluntarily terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus a 10% processing fee. We may also allow the associate or preferred customer to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. 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.

Current wording

•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 voluntarily terminating his/her account. If an associate or preferred customer returns a product unopened and in good condition, he/she may receive a full refund minus any shipping cost, if applicable. 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.