Natures Sunshine Products Inc: Form 10-Q for the period ended Jun 30, 2024

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, 2023, 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.

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. 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 Eastern Europe for the three and six months ended June 30, 2024 were $14.2 million and $28.9 million, respectively, compared to $14.6 million and $29.1 million for the same periods in 2023. Operating income related to Eastern Europe for the three and six months ended June 30, 2024 was $0.8 million and $2.3 million, respectively, compared to $0.3 million and $0.8 million for the same periods in 2023. As of June 30, 2024, Eastern Europe had assets of $6.7 million net of working capital reserves related to inventories.

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.

Inflation

Like many other companies, we are facing significant inflationary pressures in the global economy. 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.

Second Quarter Performance

In the second quarter of 2024, we experienced a decrease in our consolidated net sales of 5.1 percent (or 2.6 percent in local currencies) compared to the same period in 2023. Asia net sales decreased approximately 8.9 percent (or 3.2 percent in local currencies) compared to the same period in 2023. Europe net sales increased approximately 1.7 percent (or 0.9 percent in local currencies) compared to the same period in 2023. North America net sales decreased approximately 3.2 percent (or 3.0 percent in local currencies) compared to the same period in 2023. Latin America and Other net sales decreased approximately 6.5 percent (or 7.6 percent in local currencies) compared to the same period in 2023. The strengthening of the U.S. dollar versus the local currencies, primarily in our Asian markets, resulted in an approximate 2.5 percent, or $3.0 million, decrease of our net sales during the quarter.

Cost of sales decreased $0.3 million during the three months ended June 30, 2024, compared to the same period in 2023, and as a percentage of net sales were 28.6 percent and 27.4 percent for the three months ended June 30, 2024 and 2023, respectively. The increase in cost of sales percentage is primarily due to increases related to higher inflation and unfavorable foreign exchange which offset our savings initiatives.

In absolute terms, selling, general and administrative expenses decreased $3.7 million during the three months ended June 30, 2024, compared to the same period in 2023, and as a percentage of net sales were 34.9 percent and 36.3 percent for the three months ended June 30, 2024 and 2023, respectively. The decrease was primarily related to the streamlining of our global overhead expenses and reduced service fees due to China's lower net sales.

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.

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 June 30, 2024 and 2023 (dollar amounts in thousands):

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 six months ended June 30, 2024 and 2023 (dollar amounts in thousands):

21

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.

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 June 30, 2024 and 2023 (dollar amounts in thousands):

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 six months ended June 30, 2024 and 2023 (dollar amounts in thousands):

Consolidated net sales for the three and six months ended June 30, 2024 were $110.6 million and $221.5 million, respectively, compared to $116.5 million and $225.2 million for the same period in 2023, which represents decreases of 5.1 percent and 1.6 percent, respectively. The decrease was primarily related to product sales declines in our Asia operating segment. Excluding the impact of foreign currency exchange rate fluctuations, consolidated net sales for the three and six months ended June 30, 2024 decreased 2.6 percent and increased 0.5 percent, respectively, from the same periods in 2023.

Asia

Net sales related to Asia for the three and six months ended June 30, 2024 were $50.0 million and $96.2 million, respectively, compared to $54.9 million and $101.2 million for the same periods in 2023, or decreases of 8.9 percent and 5.0 percent, respectively. In local currency, net sales for the three and six months ended June 30, 2024 decreased 3.2 percent and increased 0.6 percent, respectively, compared to the same periods in 2023.

Notable activity in the following markets contributed to the results of Asia:

In our Taiwan market, net sales increased $0.3 million and $1.8 million, or 1.7 percent and 6.2 percent, for the three and six months ended June 30, 2024, compared to the same periods in 2023. In local currencies, net sales for the three and six months ended June 30, 2024 increased 7.1 percent and 10.9 percent, compared to the same periods in 2023. We attribute the growth in net sales primarily to effective execution of fundamentals to accelerate customer acquisition.

In our South Korea market, net sales for the three months ended June 30, 2024 decreased $0.4 million or 2.8 percent, compared to the same period in 2023. Net sales remained flat for the six months ended June 30, 2024, compared to the same period in 2023. In local currency, net sales for the three and six months ended June 30, 2024 increased 1.4 percent and 4.3 percent, respectively, compared to the same periods in 2023. Net sales continued to show a modest improvement.

In our Japan market, net sales decreased $1.4 million and $2.2 million, or 12.3 percent and 10.5 percent, for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023. In local currencies, net sales for the three and six months ended June 30, 2024 decreased 0.4 percent and increased 1.1 percent, respectively, compared to the same periods in 2023. The decrease in net sales was primarily the result of strong customer acquisition that was offset by lower average order values.

In our China market, net sales decreased $3.6 million and $4.8 million, or 28.6 percent and 21.8 percent, for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023. In local currencies, net sales for the three and six months ended June 30, 2024 decreased 26.3 percent and 19.1 percent, respectively, compared to the same periods in 2023. The decrease in net sales was primarily the result of reduced activity resulting from challenging macroeconomic factors.

Europe

Net sales related to Europe for the three and six months ended June 30, 2024 were $21.6 million and $43.9 million, respectively, compared to $21.2 million and $42.6 million for the same periods in 2023, or an increase of 1.7 percent and 2.9 percent, respectively. In local currency, net sales for the three and six months ended June 30, 2024 increased 0.9 percent and 1.4 percent, respectively, compared to the same periods in 2023. The functional currency for many of these markets is the U.S. Dollar which reduces the effect from foreign currency fluctuations. Fluctuations in foreign currency exchange rates had favorable impacts on net sales of $0.2 million and $0.7 million for the three and six months ended June 30, 2024, respectively. We attribute the increase in net sales in local currency primarily due to the increased focus on our field activation initiatives.

North America

Net sales related to North America for the three and six months ended June 30, 2024 were $33.6 million and $70.1 million, respectively, compared to $34.7 million and $69.3 million for the same periods in 2023, or a decrease of 3.2 percent and an increase of 1.1 percent, respectively. In local currency, net sales for the three and six months ended June 30, 2024 decreased 3.0 percent and increased 1.2 percent, respectively, compared to the same periods in 2023.

In the United States, net sales for the three and six months ended June 30, 2024 decreased $1.3 million and increased $0.6 million, or a decrease of 3.6 percent and an increase of 0.9 percent, respectively, compared to the same periods in 2023. The decrease was primarily due to temporary disruptions related to the launch of our enhanced digital platform.

Latin America and Other

Net sales related to Latin America and Other markets for the three and six months ended June 30, 2024 were $5.4 million and $11.4 million, respectively, compared to $5.8 million and $12.0 million for the same periods in 2023, or decreases of 6.5 percent and 5.5 percent, respectively. In local currency, net sales for the three and six months ended June 30, 2024 decreased 7.6 percent and 7.8 percent, respectively, compared to the same periods in 2023. Fluctuations in foreign currency had favorable impacts on net sales of $0.1 million and $0.3 million for the three and six months ended June 30, 2024, respectively.

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.

Cost of Sales

Cost of sales as a percent of net sales was 28.6 percent and 28.7 percent for the three and six months ended June 30, 2024, compared to 27.4 percent and 28.3 percent for the same periods in 2023. The increase in cost of sales percentage is primarily due to increases related to higher inflation and unfavorable foreign exchange which offset our savings initiatives.

Volume Incentives

Volume incentives expense as a percent of net sales was 31.4 percent and 30.8 percent for the three and six months ended June 30, 2024, respectively, compared to 30.3 percent and 30.4 percent for the same periods in 2023. The increase was primarily due to the timing of promotional incentives and changes in market mix. 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 the timing of promotional incentives and changes in market mix.

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 $3.7 million and $6.6 million, respectively, to $38.6 million and $79.3 million for the three and six months ended June 30, 2024, respectively, compared to the same periods in 2023. Selling, general and administrative expenses were 34.9 percent and 35.8 percent of net sales for the three and six months ended June 30, 2024, compared to 36.3 percent and 38.2 percent for the same periods in 2023. The decrease was primarily related to the streamlining of our global overhead expenses and reduced service fees due to China's lower net sales.

Other Income (Loss), Net

Other income (loss), net, for the three and six months ended June 30, 2024, were losses of $1.2 million and $1.2 million, respectively, compared to loss of $1.1 million and income of $0.4 million during the same periods in 2023, respectively. Other income (loss), net for the three and six months ended June 30, 2024 primarily consisted of foreign exchange losses as a result of net changes in foreign currencies primarily in Asia.

Income Taxes

For the three months ended June 30, 2024 and 2023, our provision for income taxes, as a percentage of income before income taxes was 66.4 percent and 55.0 percent, respectively, compared with a U.S. federal statutory rate of 21.0 percent. For the six months ended June 30, 2024 and 2023, our provision for income taxes, as a percentage of income before income taxes was 56.2 percent and 48.5 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 six months ended June 30, 2024, was primarily attributed to operations in foreign countries which are treated as a branch for US tax purposes and current year foreign losses that presently do not provide future tax benefit, partially offset by foreign tax credits.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and six months ended June 30, 2023, was primarily attributed to tax liability related to foreign operations which are treated as a branch for US

tax purposes as well as recording a valuation allowance against deferred tax assets which were expected to expire before utilization.

The difference between the effective tax rate for the three and six months ended June 30, 2024, compared to June 30, 2023, is primarily caused by a decrease in the utilization of foreign tax credits in the current period.

Our U.S. federal income tax returns for 2020 through 2022 are open to examination for federal tax purposes. We have several foreign tax jurisdictions that have open tax years from 2018 through 2023.

As of June 30, 2024 and December 31, 2023, we have accrued $0.9 million and $0.3 million, respectively, related to unrecognized tax positions.

Product Categories

Our line of over 800 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 six months ended June 30, 2024 and 2023, 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. 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 June 30, 2024 and 2023, 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.

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 June 30, 2024, working capital was $88.4 million, compared to $89.1 million as of December 31, 2023. At June 30, 2024, we had $68.7 million in cash, of which $6.4 million was held in the U.S. and $62.3 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):

Operating Activities

For the six months ended June 30, 2024, operating activities provided cash of $3.5 million, compared to $17.3 million in the same period in 2023. Operating cash flows decreased primarily due to the timing of payments for accrued liabilities, lease liabilities, income taxes payable, and timing of receipts of accounts receivable.

Investing Activities

For the six months ended June 30, 2024, investing activities used $7.0 million, compared to $4.7 million for the same period in 2023, which consisted of capital expenditures related to the purchase of equipment, computer systems and software.

Financing Activities

For the six months ended June 30, 2024, financing activities used $8.3 million, compared to $1.8 million in cash for the same period in 2023.

During the six months ended June 30, 2024, we used cash to repurchase 453,000 shares of our common stock under the share repurchase program for $7.7 million. At June 30, 2024, the remaining balance available for repurchases under the program was $9.9 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 June 30, 2024, there was no outstanding balances under the Credit Agreement or the Capital Credit Agreement. 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 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, 2023. 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 11, “Revenue Recognition,” to our Condensed Consolidated Financial Statements in Item 1, Part 1 of this report.

Inventories

Inventories are adjusted to the 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 regarding 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 9, “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. 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.

We conduct business in several countries and intend to grow our international operations. Net sales, operating income and net income are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling products in more than one currency. In addition, our operations are exposed to risks associated with changes in social, political and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where we have operations, as well as, to a lesser extent, changes in U.S. laws and regulations relating to international trade and investment. For further information, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.

Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2024.

Management’s Report on Internal Control over Financial Reporting

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment under this framework, management has concluded that our internal controls over financial reporting were effective as of June 30, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the information set forth in this report, you should carefully consider the risks discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could have a material adverse effect on our business or consolidated financial statements, results of operations, and cash flows. Additional risks not currently known, or risks that are currently believed to be not material, may also impair business operations. There have been no material changes to our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2023.