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NATURE'S SUNSHINE PRODUCTS, INC.

(NATR)
  Report
Delayed Nasdaq  -  04:00:00 2023-01-30 pm EST
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2022NATURES SUNSHINE PRODUCTS INC Change in Directors or Principal Officers (form 8-K/A)
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2022Natures Sunshine Products Inc : Change in Directors or Principal Officers, Financial Statements and Exhibits (form 8-K)
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2022Nature's Sunshine Products, Inc. Appoints Shane Jones as Executive Vice President, Effective December 30, 2022
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NATURES SUNSHINE PRODUCTS INC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/03/2022 | 04:14pm EST
The following Management's Discussion and Analysis should be read in conjunction
with the unaudited condensed consolidated financial statements and notes thereto
included in this report, as well as the consolidated financial statements, the
notes thereto, and management's discussion and analysis included in our Annual
Report on Form 10-K for the year ended December 31, 2021, and our other reports
filed since the date of such Form 10-K.

OVERVIEW


We are a natural health and wellness company primarily engaged in the
manufacture and sale of nutritional and personal care products. We are a Utah
corporation with our principal place of business in Lehi, Utah, and sell our
products directly to customers and to a sales force of independent consultants
who resell our products to consumers.

Our independent consultants market and sell our products to customers and
sponsor other independent consultants who also market our products to customers.
Because a significant amount of revenue is generated through the sales of our
independent consultants, our revenue can be impacted by the number and
productivity of our independent consultants. We seek to motivate and provide
incentives to our independent consultants by offering high quality products,
product support, training seminars, and financial incentives, among other
considerations.

COVID-19


In or about December 2019, a novel strain of coronavirus, SARS-CoV-2 "COVID-19",
began aggressively spreading throughout the world, including all the primary
markets where we conduct business. As COVID-19 has spread throughout the world,
it has impacted our markets differently. At various times during the course of
the pandemic and throughout our markets, governments have issued orders and
restrictions that have limited the ability of our consultants to meet with
consumers, put downward pressure on our sales in many of our markets and added
substantial uncertainties to our global supply chain. Different variants of
COVID-19 continue to arise and spread in various places around the world. We
continue to take actions to mitigate the effects COVID-19 may have on our
business, such actions may ultimately be insufficient to avoid substantial
impact on the consolidated financial statement or material health of the
Company. At this time, the duration of any business disruption and related
financial impact cannot be reasonably estimated.

Eastern Europe


On February 24, 2022, Russian forces launched significant military action
against Ukraine. There continues to be sustained conflict and disruption in the
region, which is expected to endure for the foreseeable future. Our consultants
in our Russia and Other market, a market within our Europe business segment that
includes Russia, Ukraine, Belarus and other Common Independent States in the
region, continue to operate their independent businesses, albeit at a reduced
level than prior to the start of the conflict. For the nine months ended
September 30, 2022, we have recorded a pretax charge of $2.3 million, primarily
related to the impairment of inventory, as well as accruals for contractual
obligations related to Russian operations. We expect that this will continue to
impact our business for the foreseeable future. We will continue monitoring the
social, political, regulatory and economic environment in Ukraine and Russia,
and will consider further actions as appropriate.

Net sales related to Russia and Other for the three and nine months ended
September 30, 2022, were $13.3 million and $38.9 million, respectively, compared
to $14.6 million and $42.9 million for the same periods in 2021. Operating
income related to Russia and Other for the three and nine months ended
September 30, 2022, was $1.0 million and $3.2 million, respectively, prior to
the charges noted above, compared to $1.4 million and $4.1 million for the same
periods in 2021. As of September 30, 2022, Russia and Other had assets of $5.9
million, net of working capital reserves, which primarily consisted of
inventories and accounts receivable.

More broadly, there could be additional negative impacts to our net sales,
earnings and cash flows should the situation escalate beyond its current scope,
including, among other potential impacts, economic recessions in certain
neighboring countries or globally due to inflationary pressures and supply chain
cost increases or the geographic proximity of the war relative to the rest of
Europe.

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Inflation

In 2021, the inflation rate in the U.S. began to increase significantly. In
2022, the inflation rate increase accelerated and during the nine months ended
September 30, 2022, was the highest in 40 years. Europe and other areas in which
we do business are also experiencing higher levels of inflation. Our operations
have been, and may continue to be, adversely impacted by inflation, primarily
from higher costs of raw materials, labor, production, distribution and
transportation costs.

In the third quarter of 2022, we experienced a decrease in our consolidated net
sales of 8.9 percent (or 2.3 percent in local currencies) compared to the same
period in 2021. Asia net sales decreased approximately 1.1 percent (or increased
11.9 percent in local currencies) compared to the same period in 2021. Europe
net sales decreased approximately 11.4 percent (or 6.0 percent in local
currencies) compared to the same period in 2021. North America net sales
decreased approximately 16.5 percent (or 16.3 percent in local currencies)
compared to the same period in 2021. Latin America and Other net sales decreased
approximately 14.5 percent (or 13.3 percent in local currencies) compared to the
same period in 2021. The strengthening of the U.S. dollar versus the local
currencies, primarily in our Asian and European markets, resulted in an
approximate 6.6 percent, or $7.6 million, decrease of our net sales during the
quarter.

Cost of sales increased $0.2 million during the three months ended September 30,
2022, compared to the same period in 2021, and as a percentage of net sales were
28.4 percent and 25.6 percent for the three months ended September 30, 2022 and
2021, respectively. The increase in cost of sales percentage is primarily due to
changes in inventory valuation reserves, changes in market mix, heightened
inflation, and increases in raw materials, production and transportation costs.
For the nine months ended September 30, 2022, we had incremental valuation
charges of $5.0 million related to inventory. Of that amount, $1.7 million
related to the conflict between Russia and Ukraine, and $3.3 million related to
changes in forecasted demand and production issues, among other factors.

In absolute terms, selling, general and administrative expenses decreased $2.7
million during the three months ended September 30, 2022, compared to the same
period in 2021, and as a percentage of net sales were 35.2 percent and 34.4
percent for the three months ended September 30, 2022 and 2021, respectively.
The dollar decrease was primarily related to lower service fees that resulted
from a decline in China's net sales, lower expenses relating to declines in
Russia and Other's net sales, and lower compensation, partially offset by
increases in the expected level of convention and distributor events.

As an international business, we have significant sales and costs denominated in
currencies other than the U.S. Dollar. We expect foreign markets with functional
currencies other than the U.S. Dollar will continue to represent a substantial
portion of our overall sales and related operating expenses. Accordingly,
changes in foreign currency exchange rates could materially affect sales and
costs or the comparability of sales and costs from period to period as a result
of translating foreign markets financial statements into our reporting currency.

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RESULTS OF OPERATIONS

The following table summarizes our unaudited consolidated operating results from
continuing operations in U.S. dollars and as a percentage of net sales for the
three months ended September 30, 2022 and 2021 (dollar amounts in thousands):


                                             Three Months Ended                            Three Months Ended
                                             September 30, 2022                            September 30, 2021                                  Change
                                       Total               Percent of                Total               Percent of               Total
                                      dollars               net sales               dollars               net sales              dollars              Percentage
Net sales                          $  104,506                     100.0  %       $  114,746                     100.0  %       $ (10,240)                      (8.9) %
Cost of sales                          29,632                      28.4              29,419                      25.6                213                        0.7
Gross profit                           74,874                      71.6              85,327                      74.4            (10,453)                     (12.3)
Volume incentives                      33,070                      31.6              35,793                      31.2             (2,723)                      (7.6)
SG&A expenses                          36,792                      35.2              39,528                      34.4             (2,736)                      (6.9)
Operating income                        5,012                       4.8              10,006                       8.7             (4,994)                     (49.9)
Other loss, net                        (2,281)                     (2.2)               (886)                     (0.8)            (1,395)                    (157.4)
Income before income taxes              2,731                       2.6               9,120                       7.9             (6,389)                     (70.1)
Provision for income taxes              2,531                       2.4               3,662                       3.2             (1,131)                     (30.9)
Net income                         $      200                       0.2  %       $    5,458                       4.8  %       $  (5,258)                     (96.3) %



The following table summarizes our unaudited consolidated operating results from
continuing operations in U.S. dollars and as a percentage of net sales for the
nine months ended September 30, 2022 and 2021 (dollar amounts in thousands):


                                              Nine Months Ended                             Nine Months Ended
                                             September 30, 2022                            September 30, 2021                                  Change
                                       Total               Percent of                Total               Percent of               Total
                                      dollars               net sales               dollars               net sales              dollars              Percentage
Net sales                          $  319,161                     100.0  %       $  326,145                     100.0  %       $  (6,984)                      (2.1) %
Cost of sales                          93,563                      29.3              84,861                      26.0              8,702                       10.3
Gross profit                          225,598                      70.7             241,284                      74.0            (15,686)                      (6.5)
Volume incentives                      99,241                      31.1             105,491                      32.3             (6,250)                      (5.9)
SG&A expenses                         114,281                      35.8             108,666                      33.3              5,615                        5.2
Operating income                       12,076                       3.8              27,127                       8.3            (15,051)                     (55.5)
Other loss, net                        (3,037)                     (1.0)             (2,290)                     (0.7)              (747)                     (32.6)
Income before income taxes              9,039                       2.8              24,837                       7.6            (15,798)                     (63.6)
Provision for income taxes             10,573                       3.3               8,433                       2.6              2,140                       25.4
Net income (loss)                  $   (1,534)                     (0.5) %       $   16,404                       5.0  %       $ (17,938)                    (109.4) %



 Net Sales

International operations have provided, and are expected to continue to provide,
a significant portion of our total net sales. As a result, total net sales will
continue to be affected by fluctuations in the U.S. dollar against foreign
currencies. In order to provide a framework for assessing how our underlying
businesses performed excluding the effect of foreign currency fluctuations, in
addition to comparing the percent change in net sales from one period to another
in U.S. dollars, we present net sales excluding the impact of foreign exchange
fluctuations. We compare the percentage change in net sales from one period to
another period by excluding the effects of foreign currency exchange as shown
below. Net sales excluding the impact of foreign exchange fluctuations is not a
U.S. GAAP financial measure and removes from net sales in U.S. dollars the
impact of changes in exchange rates between the U.S. dollar and the functional
currencies of our foreign subsidiaries, by translating the current period net
sales into U.S. dollars using the same foreign currency exchange rates that were
used to translate the net sales for the previous comparable period. We believe
presenting the impact of foreign currency fluctuations is useful to investors
because it allows a more meaningful comparison of net sales of our foreign
operations from period to period. However, net sales excluding the impact of
foreign currency fluctuations should not be considered in isolation or as an
alternative to net sales in U.S. dollar measures that reflect current period
exchange rates, or to other financial measures calculated and presented in
accordance with U.S. GAAP. Throughout the last five years, foreign currency
exchange rates have fluctuated significantly. See Item 3. Quantitative and
Qualitative Disclosures about Market Risk.
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The following table summarizes the changes in net sales by operating segment
with a reconciliation to net sales excluding the impact of currency fluctuations
for the three months ended September 30, 2022 and 2021 (dollar amounts in
thousands):
                                                                         

Net Sales by Operating Segment

                                                                                                                               Percent
                                       Three Months         Three Months                                                        Change
                                          Ended                 Ended                                   Impact of             Excluding
                                      September 30,         September 30,           Percent              Currency             Impact of
                                           2022                 2021                 Change              Exchange              Currency
Asia                                 $      47,878          $   48,417                   (1.1) %       $  (6,307)                    11.9  %
Europe                                      19,328              21,813                  (11.4)            (1,166)                    (6.0)
North America                               31,504              37,738                  (16.5)               (89)                   (16.3)
Latin America and Other                      5,796               6,778                  (14.5)               (81)                   (13.3)
                                     $     104,506          $  114,746                   (8.9) %       $  (7,643)                    (2.3) %



The following table summarizes the changes in net sales by operating segment
with a reconciliation to net sales excluding the impact of currency fluctuations
for the nine months ended September 30, 2022 and 2021 (dollar amounts in
thousands):

                                                                         

Net Sales by Operating Segment

                                                                                                                              Percent
                                       Nine Months          Nine Months                                                        Change
                                          Ended                Ended                                   Impact of             Excluding
                                      September 30,        September 30,           Percent              Currency             Impact of
                                          2022                 2021                 Change              Exchange              Currency
Asia                                 $    141,370          $  127,708                   10.7  %       $ (12,515)                    20.5  %
Europe                                     58,204              65,468                  (11.1)            (2,607)                    (7.1)
North America                             101,567             112,872                  (10.0)              (192)                    (9.8)
Latin America and Other                    18,020              20,097                  (10.3)              (168)                    (9.5)
                                     $    319,161          $  326,145                   (2.1) %       $ (15,482)                     2.6  %



Consolidated net sales for the three and nine months ended September 30, 2022,
were $104.5 million and $319.2 million, respectively, compared to $114.7 million
and $326.1 million for the same period in 2021, which represents decreases of
8.9 percent and 2.1 percent, respectively. The decrease was primarily related to
product sales declines in our Europe, North America, and Latin America and Other
operating segments. Excluding the impact of foreign currency exchange rate
fluctuations, consolidated net sales for the three and nine months ended
September 30, 2022, decreased 2.3 percent and increased 2.6 percent,
respectively, from the same periods in 2021.

Asia


Net sales related to Asia for the three and nine months ended September 30,
2022, were $47.9 million and $141.4 million, respectively, compared to $48.4
million and $127.7 million for the same periods in 2021, or decrease of 1.1
percent and increase of 10.7 percent, respectively. In local currency, net sales
for the three and nine months ended September 30, 2022, increased 11.9 percent
and 20.5 percent, respectively, compared to the same periods in 2021.
Notable activity in the following markets contributed to the results of Asia:

In our South Korea market, net sales decreased $1.0 million and $5.3 million, or
6.4 percent and 10.9 percent, for the three and nine months ended September 30,
2022, respectively, compared to the same periods in 2021. In local currency, net
sales for the three and nine months ended September 30, 2022, increased 7.7
percent and decreased 0.3 percent, respectively, compared to the same periods in
2021. The increase in local currency for the three months ended September 30,
2022, was primarily the result of product promotions intended to stimulate
activity as well as an increase in demand for nutritional supplements. The
decrease in local currency for the nine months ended September 30, 2022, was
primarily the result of government restrictions in the market intended to slow
the spread of COVID-19, which were not lifted until the second quarter.

In our Taiwan market, net sales increased $6.1 million and $20.3 million, or
82.9 percent and 136.5 percent, for the three and nine months ended
September 30, 2022, compared to the same periods in 2021. In local currencies,
net sales for the three
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and nine months ended September 30, 2022, increased 97.4 percent and 147.1
percent, compared to the same periods in 2021. We attribute the growth in net
sales primarily to product promotions intended to stimulate activity as well as
an increase in demand for nutritional supplements.

In our Japan market, net sales decreased $0.2 million and increased $3.0
million, or decreased 1.8 percent and increased 11.1 percent, for the three and
nine months ended September 30, 2022, respectively, compared to the same periods
in 2021. In local currencies, net sales for the three and nine months ended
September 30, 2022, increased 22.0 percent and 30.3 percent, respectively,
compared to the same periods in 2021. We attribute the growth in net sales
primarily to product promotions intended to stimulate activity as well as an
increase in demand for nutritional supplements.

In our China market, net sales decreased $4.3 million and $1.2 million, or 34.5
percent and 3.8 percent, for the three and nine months ended September 30, 2022,
respectively, compared to the same periods in 2021. In local currencies, net
sales for the three and nine months ended September 30, 2022, decreased 30.8
percent and 2.2 percent, respectively, compared to the same periods in 2021. The
decrease in net sales was primarily the result of additional government
restrictions in the market intended to slow the spread of COVID-19, which
included lockdowns during the third quarter.

Europe


Net sales related to Europe for the three and nine months ended September 30,
2022, were $19.3 million and $58.2 million, respectively, compared to $21.8
million and $65.5 million for the same periods in 2021, or decreases of 11.4
percent and 11.1 percent, respectively. In local currency, net sales for the
three and nine months ended September 30, 2022, decreased 6.0 percent and 7.1
percent, respectively, compared to the same periods in 2021. The functional
currency for many of these markets is the U.S. Dollar which reduces the effect
from foreign currency fluctuations. Fluctuations in foreign exchange rates had
unfavorable impacts on net sales of $1.2 million and $2.6 million for the three
and nine months ended September 30, 2022, respectively. Net sales decreased
primarily as a result of conflict between Russia and Ukraine which has placed
significant financial pressures on the surrounding Western and Eastern Europe
markets, and customer sensitivity due to inflationary pressures, among other
factors.

North America

Net sales related to North America for the three and nine months ended
September 30, 2022, were $31.5 million and $101.6 million, respectively,
compared to $37.7 million and $112.9 million for the same periods in 2021, or
decreases of 16.5 percent and 10.0 percent, respectively. In local currency, net
sales for the three and nine months ended September 30, 2022, decreased 16.3
percent and 9.8 percent, respectively, compared to the same periods in 2021.

In the United States, net sales decreased $5.9 million and $10.5 million, or
16.8 percent and 10.0 percent, for the three and nine months ended September 30,
2022, respectively, compared to the same periods in 2021. The decrease in sales
was due primarily to a reduction in the average order size attributed to
customer sensitivity due to inflationary pressures, among other factors.

Latin America and Other


Net sales related to Latin America and Other markets for the three and nine
months ended September 30, 2022, were $5.8 million and $18.0 million,
respectively, compared to $6.8 million and $20.1 million for the same periods in
2021, or decreases of 14.5 percent and 10.3 percent, respectively. In local
currency, net sales for the three and nine months ended September 30, 2022,
decreased 13.3 percent and 9.5 percent, respectively, compared to the same
periods in 2021. Fluctuations in foreign currency had unfavorable impacts on net
sales of $0.1 million and $0.2 million for the three and nine months ended
September 30, 2022, respectively. The decrease in sales was due primarily to a
reduction in the average order size attributed to customer sensitivity due to
inflationary pressures, among other factors.

Further information related to our Asia, Europe, North America, and Latin America and Other business segments is set forth in Note 7 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report.

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Cost of Sales

Cost of sales as a percent of net sales was 28.4 percent and 29.3 percent for
the three and nine months ended September 30, 2022, compared to 25.6 percent and
26.0 percent for the same periods in 2021. The increase in cost of sales
percentage is primarily due to changes in inventory valuation reserves as a
result of the conflict between Russia and Ukraine, as well as reserves for other
markets, changes in market mix, persistent inflation, unfavorable exchange
rates, and increases in raw materials, production and transportation costs. For
the nine months ended September 30, 2022, we had incremental valuation charges
of $5.0 million related to inventory. Of that amount, $1.7 million related to
the conflict between Russia and Ukraine, and $3.3 million related to changes in
forecast demand and production issues, among other factors.

Volume Incentives


Volume incentives expense as a percent of net sales was 31.6 percent and 31.1
percent for the three and nine months ended September 30, 2022, respectively,
compared to 31.2 percent and 32.3 percent for the same periods in 2021. These
payments are designed to provide incentives for reaching certain sales levels.
Volume incentives vary slightly, on a percentage basis, by product due to
pricing policies and commission plans in place in our various operations. We do
not pay volume incentives in China, instead we pay independent service fees
which are included in selling, general and administrative expenses. Volume
incentives as a percentage of net sales can fluctuate based on promotional
activity and mix of sales by market. The increase in volume incentives as a
percent of net sales for the three months ended September 30, 2022 is primarily
due to change in market mix, reflecting growth in markets where volume
incentives as a percentage of net sales are higher than the consolidated
average, and the decline in China. The decrease for the nine months ended
September 30, 2022 reflects cost savings from the September 2020 launch of our
new consultant sales and compensation plan in North America and Latin America
and Other.

Selling, General and Administrative


Selling, general and administrative expenses represent operating expenses,
components of which include labor and benefits, sales events, professional fees,
travel and entertainment, marketing, occupancy costs, communications costs, bank
fees, depreciation and amortization, independent services fees paid in China,
and other miscellaneous operating expenses.

Selling, general and administrative expenses decreased by $2.7 million and $5.6
million, respectively, to $36.8 million and $114.3 million for the three and
nine months ended September 30, 2022, respectively, compared to the same periods
in 2021. Selling, general and administrative expenses were 35.2 percent and 35.8
percent of net sales for the three and nine months ended September 30, 2022,
compared to 34.4 percent and 33.3 percent for the same periods in 2021. The
dollar decrease was primarily related to lower service fees that resulted from a
decline in China's net sales, lower expenses relating to declines in Russia and
Other's net sales, and lower compensation expense, partially offset by increases
in consultant events, promotions and marketing.

Other Loss, Net


Other loss, net, for the three and nine months ended September 30, 2022, were
losses of $2.3 million and $3.0 million, respectively, compared to $0.9 million
and $2.3 million during the same periods in 2021, respectively. Other loss, net
for the three and nine months ended September 30, 2022 primarily consisted of
foreign exchange losses as a result of net changes in foreign currencies
primarily in Asia, Europe and Latin America.

Income Taxes


For the three months ended September 30, 2022 and 2021, our provision for income
taxes, as a percentage of income before income taxes was 92.7 percent and 40.2
percent, respectively, compared with a U.S. federal statutory rate of 21.0
percent. For the nine months ended September 30, 2022 and 2021, our provision
for income taxes, as a percentage of income before income taxes was 117.0
percent and 34.0 percent, respectively, compared with a U.S. federal statutory
rate of 21.0 percent.

The difference between the effective tax rate and the U.S. federal statutory tax
rate for the three and nine months ended September 30, 2022, was primarily
attributed to recording a valuation allowance against deferred tax assets for
which we do not expect to receive a benefit.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and nine months ended September 30, 2021, was primarily attributed to an increase in tax liability associated with transfer pricing adjustments, non-

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Table of Contents deductible executive compensation, and net unfavorable foreign tax related items, partially offset by favorable deductions for stock compensation.

The difference between the effective tax rate for the three and nine months ended September 30, 2022 compared to September 30, 2021 is primarily caused by recording a valuation allowance in the current period against deferred tax assets for which we do not expect to receive a benefit.

Our U.S. federal income tax returns for 2018 through 2021 are open to examination for federal tax purposes. We have several foreign tax jurisdictions that have open tax years from 2016 through 2021.

As of September 30, 2022 and December 31, 2021, we have accrued $0.2 million and $0, respectively, related to unrecognized tax positions.

Product Categories


Our line of over 700 products includes several different product
classifications, such as immune, cardiovascular, digestive, personal care,
weight management and other general health products. We purchase herbs and other
raw materials in bulk and, after quality control testing, we formulate,
encapsulate, tablet or concentrate them, label and package them for shipment.
Most of our products are manufactured at our facility in Spanish Fork, Utah.
Contract manufacturers produce some of our products in accordance with our
specifications and standards. We have implemented quality control procedures to
verify that our contract manufacturers have complied with our specifications and
standards.

See Note 7, Segment Information, for a summary of the U.S. dollar amounts from
the sale of general health, immune, cardiovascular, digestive, personal care and
weight management products for the three and nine months ended September 30,
2022 and 2021, by business segment.

Distribution and Marketing


We market our products primarily through our network of independent consultants,
who market our products to customers through direct selling techniques and
sponsor other independent consultants who also market our products to customers.
We seek to motivate and provide incentives to our independent consultants by
offering high quality products and providing independent consultants with
product support, training seminars, sales conventions, travel programs and
financial incentives.

Our products sold in the United States are shipped directly from our
manufacturing and warehouse facilities located in Spanish Fork, Utah, as well as
from our regional warehouses located in Georgia, Ohio and Texas. Many of our
international operations maintain warehouse facilities and inventory to supply
their independent consultants. However, in foreign markets where we do not
maintain warehouse facilities, we have contracted with third-parties to
distribute our products and provide support services to our force of independent
consultants.

In the United States, we generally sell our products on a cash or credit card
basis. From time to time, our U.S. operations extend short-term credit
associated with product promotions. For certain of our international operations,
we use independent distribution centers and offer credit terms that are
generally consistent with industry standards within each respective country.

We pay sales commissions, or "volume incentives" to our independent consultants
based upon their own product sales and the product sales of their sales
organization. As an exception, in China, we do not pay volume incentives;
rather, we pay independent service fees, which are included in selling, general
and administrative expenses. These volume incentives are recorded as an expense
in the year earned. The amounts of volume incentives that we expensed during the
quarters ended September 30, 2022 and 2021, are set forth in the Condensed
Consolidated Financial Statements in Item 1 of this report. In addition to the
opportunity to receive volume incentives, independent consultants who attain
certain levels of monthly product sales are eligible for additional incentive
programs including automobile allowances, sales convention privileges and travel
awards.

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LIQUIDITY AND CAPITAL RESOURCES

Our principal use of cash is to pay for operating expenses, including volume
incentives, inventory and raw material purchases, capital assets and funding of
international expansion. As of September 30, 2022, working capital was $78.9
million, compared to $88.0 million as of December 31, 2021. At September 30,
2022, we had $57.0 million in cash, of which $2.9 million was held in the U.S.
and $54.1 million was held in foreign markets and may be subject to various
withholding taxes and other restrictions related to repatriation before becoming
available to be used along with the normal cash flows from operations to fund
any unanticipated shortfalls in future cash flows.

Our net consolidated cash inflows (outflows) are as follows (in thousands):

                               Nine Months Ended September 30,
                                     2022                      2021
Operating activities   $         (2,866)                    $ 20,281
Investing activities             (4,730)                      (4,626)
Financing activities            (15,305)                     (29,475)



Operating Activities

For the nine months ended September 30, 2022, operating activities used cash of
$2.9 million, compared to providing cash of $20.3 million in the same period in
2021. Operating cash flows decreased primarily due to lower gross margins and
the timing of payments for accrued liabilities, accrued volume incentives and
service fees, accounts payable, deferred revenue, and receipts of accounts
receivable.

Investing Activities


For the nine months ended September 30, 2022, investing activities used $4.7
million, compared to $4.6 million for the same period in 2021, which consisted
of capital expenditures related to the purchase of equipment, computer systems
and software.

Financing Activities

For the nine months ended September 30, 2022, financing activities used $15.3 million, compared to $29.5 million in cash for the same period in 2021.


During the nine months ended September 30, 2022, we used cash to repurchase
834,000 shares of our common stock under the share repurchase program for $12.9
million. At September 30, 2022, the remaining balance available for repurchases
under the program was $24.6 million.

We maintain a revolving credit agreement with Bank of America, N.A (the "Credit
Agreement"), as well as a credit agreement with Banc of America Leasing and
Capital, LLC (the "Capital Credit Agreement"). At September 30, 2022, there was
no outstanding balance under the Credit Agreement. During the nine months ended
September 30, 2022 we made monthly payments of $0.1 million pursuant to the
Capital Credit Agreement. As of September 30, 2022, there was $1.5 million
outstanding balance under the Capital Credit Agreement, $1.3 million of which
was classified as current. Our debt obligations are discussed in greater detail
in Note 4, "Revolving Credit Facility and Other Obligations," to our Condensed
Consolidated Financial Statements in Item 1, Part 1 of this report.

We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including capital expenditures, on both a short- and long-term basis.


In addition, other things such as a prolonged economic downturn, a decrease in
demand for our products, an unfavorable settlement of our unrecognized tax
positions or non-income tax contingencies could adversely affect our long-term
liquidity.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


Our consolidated financial statements have been prepared in accordance with U.S.
GAAP and form the basis for the following discussion and analysis on critical
accounting policies and estimates. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and
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related disclosure of contingent assets and liabilities. On a regular basis, we
evaluate our estimates and assumptions. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from these
estimates and those differences could have a material effect on our financial
position and results of operations. We have discussed the development, selection
and disclosure of these estimates with the Board of Directors and our Audit
Committee.

A summary of our significant accounting policies is provided in Note 1 of the
Notes to Consolidated Financial Statements in Item 8 of the Annual Report on
Form 10-K for the year ended December 31, 2021. We believe the critical
accounting policies and estimates described below reflect our more significant
estimates and assumptions used in the preparation of the consolidated financial
statements. The impact and any associated risks on our business that are related
to these policies are also discussed throughout this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" where such
policies affect reported and expected financial results.

Revenue Recognition

Our revenue recognition practices are discussed in Note 12, "Revenue Recognition," to our Condensed Consolidated Financial Statements in Item 1, Part 1 of this report.


Inventories

Inventories are adjusted to lower of cost and net realizable value, using the
first-in, first-out method. The components of inventory cost include raw
materials, labor and overhead. To estimate any necessary adjustments, various
assumptions are made in regard to excess or slow-moving inventories,
non-conforming inventories, expiration dates, current and future product demand,
production planning and market conditions. If future demand and market
conditions are less favorable than our assumptions, additional inventory
adjustments could be required.

Incentive Trip Accrual


We accrue for expenses associated with our direct sales program, which rewards
independent consultants with paid attendance for incentive trips, including our
conventions and meetings. Expenses associated with incentive trips are accrued
over qualification periods as they are earned. We specifically analyze incentive
trip accruals based on historical and current sales trends as well as
contractual obligations when evaluating the adequacy of the incentive trip
accrual. Actual results could generate liabilities more or less than the amounts
recorded.

Contingencies

We are involved in certain legal proceedings and disputes. When a loss is
considered probable in connection with litigation or non-income tax
contingencies and when such loss can be reasonably estimated with a range, we
record our best estimate within the range related to the contingency. If there
is no best estimate, we record the minimum of the range. As additional
information becomes available, we assess the potential liability related to the
contingency and revise the estimates. Revision in estimates of the potential
liabilities could materially affect our results of operations in the period of
adjustment. Our contingencies are discussed in further detail in Note 10,
"Commitments and Contingencies", to the Notes of our Condensed Consolidated
Financial Statements, of Item 1, Part 1 of this report.

Income Taxes


Our provision for income taxes, deferred tax assets and liabilities and
contingent reserves reflect management's best assessment of estimated future
taxes to be paid. We are subject to income taxes in both the United States and
numerous foreign jurisdictions. Significant judgments and estimates are required
in determining our consolidated provision for income taxes.

Deferred income taxes arise from temporary differences between the tax and
financial statement recognition of revenue and expense. In evaluating our
ability to recover our deferred tax assets, management considers all available
positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies and recent
financial operations. In projecting future taxable income, we develop
assumptions including the amount of future state, federal and foreign pretax
operating income, the reversal of temporary differences, and the implementation
of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income, and are
consistent with the plans and estimates that we are using to manage the
underlying businesses.
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Valuation allowances are recorded as reserves against net deferred tax assets by
us when it is determined that net deferred tax assets are not likely to be
realized in the foreseeable future.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on our results of operations, cash flows or financial position.


The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a multitude of
jurisdictions across our global operations. Income tax positions must meet a
more-likely-than-not recognition threshold to be recognized.

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