What changed in this filing

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Item 1A. Risk Factors

2021-03-19 compared with 2020-03-26 · 239 added, 217 removed, 229 unchanged (67% of the section changed)

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Additional risks not currently known to us or that may currently reasonably seem immaterial also may have an adverse effect on our business.

Risks Affecting Our Business and Industry

If we are unable to attract and retain independent associates, our business may suffer.

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The loss of key high-level independent associate leaders could negatively impact our associate growth and our revenue.

As of December 31, 2019, we had approximately 169,000 active independent associates and preferred customer positions held by individuals who purchased our products within the last 12 months, of which 194 occupied the highest associate levels under our global compensation plan.

As of December 31, 2020, we had approximately 183,000 active associates and preferred customer positions held by individuals who purchased our products and/or packs or paid associate fees within the last 12 months, of which 191 occupied the highest associate levels under our global compensation plan.

These independent associate leaders are important in maintaining and growing our revenue.

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• to address other business needs.

An increase in the amount of commissions and incentives paid to independent associates reduces our profitability.

However, changes could be viewed negatively by some independent associates, could cause failure to achieve desired long-term results and have a negative impact on revenue.

An increase in the amount of commissions and incentives paid to independent associates adversely affects our earnings.

The payment of commissions and incentives, including bonuses and prizes, is our most significant expense.

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Furthermore, such changes may make it difficult to attract and retain independent associates or cause us to lose some of our existing independent associates.

The loss of key management personnel could adversely affect our business.

The loss of key management personnel could adversely affect our business, financial condition, results of operations or independent associate relations.

We depend on the continued services of our executive officers and senior management team as they work closely with independent associate leaders and are responsible for our day-to-day operations.

Our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team.

Although we have entered into employment agreements with certain senior executive officers, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure that our senior executive officers or members of our senior management team will remain with us.

Although we have entered into employment agreements with certain senior executive officers, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure you that our senior executive officers or members of our senior management team will remain with us.

The loss or limitation of the services of any of our executive officers or members of our senior management team, including our regional and country managers, or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, results of operations, or independent associate relations.

If government regulations regarding network marketing change or are interpreted or enforced in a manner adverse to our business, we may be subject to new enforcement actions and material limitations regarding our overall business model.

Network marketing is always subject to extensive governmental regulations, including foreign, federal, and state regulations.

Any change in legislation and regulations could affect our business.

Furthermore, significant penalties could be imposed on us for failure to comply with various statutes or regulations.

Violations may result from:

ambiguity in statutes;

regulations and related court decisions;

the discretion afforded to regulatory authorities and courts interpreting and enforcing laws;

new regulations affecting our business;

changes to, or interpretations of, existing regulations affecting our business.

On January 4, 2018, The Federal Trade Commission (the “FTC”) issued “Business Guidance Concerning Multi-Level Marketing” a non-binding guidance in question-and-answer format clarifying the FTC’s enforcement position regarding multi-level marketing.

The guidance focuses on the characteristics of multi-level marketing and delineates the factors that the FTC staff is likely to consider in assessing whether or not a compensation structure is problematic.

The FTC has broad enforcement authority and, while it issues guidance on how it interprets the applicable law, that guidance is not ultimately binding on the FTC.

As a result, the FTC could decide to investigate or bring an enforcement action regarding practices that we interpret to be in line with applicable law and/or FTC guidance.

For example, the FTC has challenged the distributor compensation plans used by other multi-level-marketing companies over the last few years.

The FTC obtained consent decrees with those companies requiring those companies to (i) discontinue using all, or certain components of, their compensation plans;

and (ii) implement a compensation plan that received prior approval from the FTC.

In 2019, the FTC continued to challenge compensation plans and structures within the direct selling channel.

In October 2019, following ongoing discussions with the FTC pertaining to an enforcement action, one of our competitors changed its business model from multi-level-marketing to direct-to-consumer as part of a stipulated order for permanent injunction.

While consent decrees and orders entered into by our competitors are not binding on the Company, it does provide an insight into the FTC’s priorities regarding its interpretation and enforcement of regulations pertaining to the multi-level-marketing business model.

While we prioritize ensuring that our business and compensation model are compliant, we cannot be certain that the FTC or similar regulatory body in another country will not modify or otherwise amend its guidance, laws, or regulations or interpret in a way that would render our current practices inconsistent with the same.

Independent associates could fail to comply with our associate policies and procedures or make improper product, compensation, marketing or advertising claims that violate laws or regulations, which could result in claims against us that could harm our financial condition and operating results.

We sell our products worldwide to a sales force of independent associates.

The independent associates are independent contractors and, accordingly, we are not in a position to provide the same direction, motivation, and oversight as we would if associates were our own employees.

As a result, there can be no assurance that our associates will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our associate policies and procedures.

All independent associates sign a written contract and agree to adhere to our policies and procedures, which prohibit associates from making false, misleading or other improper claims regarding products or income potential from the distribution of the products.

However, independent associates may from time to time, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information that does not accurately describe our marketing program.

In addition to policies prohibiting improper product claims, we also have policies that prohibit our independent associates from selling our products or otherwise conducting business in markets outside of the countries in which we operate or in a manner inconsistent with how we operate in a specific country.

There is a possibility that some jurisdictions could seek to hold us responsible for independent associate activities that violate applicable laws or regulations, which could result in government or third party actions or fines against us, which could harm our financial condition and operating results.

For example, Meitai does not operate as a direct selling company in mainland China and does not hold a direct selling license in China.

Additionally, direct selling regulations in China prevent persons who are not Chinese nationals from engaging in direct selling in China.

While we have policies that prohibit our independent associates from conducting business in markets other than those in which we currently operate and we have provided information on how Meitai operates in China as a non-direct selling business under an e-commerce model, we cannot guarantee that our independent associates will not violate our policies or violate Chinese law or other applicable regulations, and therefore, might result in regulatory action and adverse publicity, which would harm our business in China or our business generally.

We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating results.

Our independent associates are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate tax records.

In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our distributors.

In the event that local laws and regulations require us to treat our independent distributors as employees, or if our distributors are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.

Challenges by private parties to the form of our network marketing system could harm our business.

We may be subject to challenges by private parties, including our independent associates and preferred customers, to the form of our network marketing system or elements of our business.

In the United States, the network marketing industry and regulatory authorities have relied on the implementation of distributor rules and policies designed to promote retail sales to protect consumers, prevent inappropriate activities, and distinguish between legitimate network marketing distribution plans and unlawful pyramid schemes.

We have adopted rules and policies based on case law, rulings of the FTC, discussions with regulatory authorities in several states, and domestic and global industry standards.

As a member of the U.S.

Direct Selling Association (the “DSA”), we are required to adhere to a code of ethics that protects our associates and their customers, and ensures all DSA members remain accountable to regulators, consumers, independent distributors, and the public.

On January 4, 2019, the DSA established a third party self-regulatory program to be administered by the Council of Better Business Bureaus (the “CBBB”).

The new entity, the Direct Selling Self-Regulatory Council (“DSSRC”), will engage in active monitoring of the entire direct selling marketplace, including websites and social media of direct selling companies and their respective independent distributors in the areas of income representations and product claims.

The DSSRC will report potentially non-compliant companies to the appropriate government agencies and will manage consumer/company complaint resolution.

Legal and regulatory requirements concerning network marketing systems, however, involve a high level of subjectivity, are inherently fact-based, and are subject to judicial interpretation.

Because of this, we can provide no assurance that we would not be harmed by the application or interpretation of statutes or regulations governing network marketing, particularly in any civil challenge by a current or former independent associate or preferred customer.

If our network marketing activities do not comply with government regulations, our business could suffer.

Many governmental agencies regulate our network marketing activities.

A government agency’s determination that our business or our independent associates have significantly violated a law or regulation could adversely affect our business.

The laws and regulations for network marketing intend to prevent fraudulent or deceptive schemes.

Our business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or regulations.

On December 5, 2018, our Korean subsidiary, Mannatech Korea (“MK”), received a visit from three officials with the Korean Fair Trade Commission (“KFTC”).

They advised MK’s management that they would be conducting a routine audit of commissions and bonuses paid to MK’s independent associates.

The physical audit was concluded on December 10, 2018.

The KFTC issued the Examiner’s Report on November 19, 2019.

Currently, MK is awaiting final approval from the KFTC about the disposition of the case.

Final approval is anticipated during the first quarter of 2020.

We cannot currently predict the outcome of the audit or any potential impact to our business, but a negative outcome could have an adverse effect on our business.

In addition, in the past, and because of the industry in which we operate, we have experienced inquiries regarding specific independent associates.

If we violate governmental regulations or fail to obtain necessary regulatory approvals, our operations could be adversely affected.

Our operation is subject to extensive laws, governmental regulations, administrative determinations, court decisions, and similar constraints at the federal, state, and local levels in our domestic and foreign markets.

These regulations primarily involve the following:

the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products;

the health and safety of dietary supplements, cosmetics and foods;

trade practice laws and network marketing laws (e.g., licensing and registration requirements;

regulations pertaining to commission payments);

our product claims and advertising by our independent associates;

our network marketing system;

pricing restrictions regarding transactions with our foreign subsidiaries or other related parties and similar regulations that affect our level of foreign taxable income;

the assessment of customs duties;

further taxation of our independent associates, which may obligate us to collect additional taxes and maintain additional records;

export and import restrictions.

Any unexpected new regulations or changes in existing regulations could significantly restrict our ability to continue operations, which could adversely affect our business.

For example, changes regarding health and safety and food and drug regulations for our nutritional products could require us to reformulate our products to comply with such regulations.

On October 16, 2018, inspectors from the FDA arrived at the Company’s headquarters to conduct an inspection of the facility and an audit of the Company’s policies and processes.

The audit included a review of the remedial steps taken by the Company in response to the Warning Letter issued by the FDA on November 14, 2017.

The FDA closed its audit on October 24, 2018 and issued its report to the Company.

The investigators had no objections to the corrective actions taken by the Company in response to the November 2017 Warning Letter.

The Company responded with corrective actions to the 2018 report on November 13, 2018.

On March 1, 2019, we received a notice from the FDA requesting a meeting to discuss and clarify the corrective actions taken in response to the audit.

The Company had 30 days to schedule a meeting with division personnel.

We believe our response met the concerns raised by the FDA and do not anticipate further action;

however, there remains the possibility that additional information or action may be requested following the meeting.

In some foreign countries, nutritional products are considered foods, while other countries consider them drugs.

Future health and safety or food and drug regulations could delay or prevent our introduction of new products or suspend or prohibit the sale of existing products in a given country or marketplace.

In addition, if we expand into other foreign markets, our operations or products could also be affected by the general stability of such foreign governments and the regulatory environment relating to network marketing and our products.

If our products are subject to high customs duties, our sales and competitive position could suffer as compared to locally produced goods.

Furthermore, import restrictions in certain countries and jurisdictions could limit our ability to import products from the United States.

We operate a non-direct selling business in mainland China.

In 2016, we formed our China subsidiary, Meitai.

Unlike Mannatech’s business operations in other markets, Meitai operates under a cross-border e-commerce model, where consumers in China can buy Mannatech products manufactured overseas via Meitai's website.

Meitai is currently not a direct selling company in China nor will it operate under a multi-level marketing model in China.

Products purchased on Meitai's website are for personal use and not for resale.

Meitai offers a rewards program to incentivize existing customers to refer other customers to purchase products from Meitai’s website.

Customs regulations in China include purchase limits to ensure that purchased products are for personal consumption.

Regulators in China may change how they interpret and enforce regulations regarding e-commerce sales and how goods are imported through the free trade zone for sale to consumers in China.

As a result, there can be no assurance that the Chinese government’s current or future interpretation and application of existing and new regulations will not negatively impact our business in China, result in regulatory investigations, or lead to fines or penalties against us.

On January 8, 2019, China’s State Administration of Market Regulation, along with 12 other government ministries and agencies, jointly launched a nationwide “100-day campaign” to crack down on illegal practices involving health products, and in particular, those operating in the direct selling channel.

The campaign was initiated amid growing controversies surrounding, Quanjian, a licensed direct selling company suspected of operating a pyramid scheme and engaging in marketing practices that exaggerated the effectiveness of its health products.

Other direct selling firms operating in China were cautioned to stop making false or exaggerated health claims through public advertising and their distributors.

As part of the 100-day campaign, China also suspended the registration, approval, and issuance of direct selling licenses.

The 100-day campaign was completed on April 18, 2019.

Subsequent to the campaign, Quanjian was fined approximately $14.0 million and its founder and chairman was sentenced to nine years in prison and assessed a fine of approximately $7.0 million.

Many direct selling companies operating in China are still experiencing negative effects to their business operations including limited sales meetings, media scrutiny, and unfavorable consumer sentiment towards direct selling companies.

Chinese officials of various ministries and agencies stated that they will continue to monitor healthcare product and direct selling companies.

The suspension on issuing direct selling licenses remains in effect and it is unclear whether there will be changes to the application processes if and when the suspension is lifted.

Increased regulatory scrutiny of nutritional supplements as well as new regulations that are being adopted in some of our markets with respect to nutritional supplements could result in more restrictive regulations and harm our results if our supplements or advertising activities are found to violate existing or new regulations or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations.

There has been an increasing movement in the United States and other markets to increase the regulation of dietary supplements, which could impose additional restrictions or requirements on us and increase the cost of doing business.

On February 11, 2019, the FDA issued a statement from FDA Commissioner, Dr.

Scott Gottlieb, regarding the agency's efforts to strengthen the regulation of dietary supplements.

The FDA will be prioritizing and focusing resources on misbranded products bearing unproven claims to treat, cure, or mitigate disease.

Commissioner Gottlieb established a Dietary Supplement Working Group tasked with reviewing the agency's organizational structure, process, procedures, and practices to identify opportunities to modernize the oversight of dietary supplements.

Additionally, on December 21, 2015, the FDA created the Office of Dietary Supplements (“ODSP”).

The creation of this new office elevates the FDA’s program from its previous status as a division under the Office of Nutrition and Dietary Supplements.

ODSP will continue to monitor the safety of dietary supplements.

In markets outside of the United States, prior to commencing operations or marketing new products, we may be required to obtain approvals, registrations, licenses, or certifications from an agency comparable to the FDA for the specific market.

Approvals or registration may require reformulation of our products or may be unavailable to us with respect to certain products or ingredients.

We must also comply with product labeling regulations, which vary by jurisdiction.

In several of our markets, new regulations have been adopted, or are likely to be adopted, in the near-term that will impose new requirements, make changes in some classifications of supplements under the regulations, or limit the claims we can make.

In addition, there has been increased regulatory scrutiny of nutritional supplements and marketing claims under existing and new regulations.

In Europe, for example, we are unable to market supplements that contain ingredients that have not been previously marketed in Europe without going through an extensive registration and approval process.

Europe is also expected to adopt additional regulations in the future to set new limits on acceptable levels of nutrients.

South Africa has also implemented new “complementary medicine” legislation, which requires a significant dossier in order to register current and new products.

Mannatech is working toward complying with the new legislation and is in contact with the Direct Selling Association in South Africa.

In August 2016, the FDA published its revised draft guidance on Dietary Supplements:

New Dietary Ingredient Notifications and Related Issues.

If a company sells a dietary supplement containing an ingredient that FDA considers either not a dietary ingredient or a new dietary ingredient (“NDI”) that needs an NDI notification, the agency may threaten or initiate enforcement against the Company.

For example, it might send a warning letter that can trigger consumer lawsuits, demand a product recall, or even work with the Department of Justice to bring a criminal action.

Our operations could be harmed if new guidance or regulations require us to reformulate products or effect new registrations, if regulatory authorities make determinations that any of our products do not comply with applicable regulatory requirements, if the cost of complying with regulatory requirements increases materially, or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations.

In addition, our operations could be harmed if governmental laws or regulations are enacted that restrict the ability of companies to market or distribute nutritional supplements or impose additional burdens or requirements on nutritional supplement companies.

If we are unable to protect the proprietary rights of our products, our business could suffer.

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We have filed patent applications for the technology relating to our Ambrotose ® , Ambrotose AO ® , Ambrotose Life ®, PhytoMatrix ® , NutriVerus™, and GI-ProBalance ® products in the United States and certain foreign countries.

As of December 31, 2019, we had nine patents for the technology relating to our Ambrotose formulation, all of which were issued, granted, and validated in eight foreign jurisdictions.

As of December 31, 2020, we had 11 patents for the technology relating to our Ambrotose formulation, all of which were issued, granted, and validated in 10 foreign jurisdictions.

In addition, we have entered into confidentiality agreements with our independent associates, suppliers, manufacturers, directors, officers, and consultants to help protect our proprietary rights.

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The pending patent applications are at various stages of processing, depending on the timeline of each market’s patent offices.

Most of our patents for the Ambrotose AO ® , GI-ProBalance ® ™, PhytoMatrix ® , NutriVerus™, and PhytoBlend ® formulations and our patents in the field of biomarker assays do not expire for another six or more years.

Our inability to develop and introduce new products that gain independent associate, preferred customer, and market acceptance could harm our business.

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If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a timely fashion, our business could suffer.

Outside manufacturers make all of our products.

Outside manufacturers produce all of our products.

Our profit margins and timely product delivery are dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner.

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We are also subject to delays caused by any interruption in the production of these materials including weather, disease, crop conditions, climate change, transportation interruptions and natural disasters or other catastrophic events.

For example, in December 2019, COVID-19 was first identified in Wuhan, Hubei Province, China.

While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.

The extent to which COVID-19 impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.

For example, in March 2020, the WHO declared the outbreak of COVID-19 as a pandemic, which has spread throughout our international regions and throughout the United States.

During 2020, the Company experienced shortages of raw materials and ingredients for some of its products.

We have experienced challenges in getting these materials and ingredients to our contract manufacturers and finished products to our distribution centers resulting from reductions in global transportation capacity.

The extent to which COVID-19 impacts our future operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of COVID-19 and multiple new variants of the virus that causes COVID-19, and the actions to contain COVID-19 or treat its impact, or the safety and efficacy of the various vaccines approved to treat COVID-19, among others.

In particular, the continued spread of COVID-19 globally could adversely impact our operations, including among others, our manufacturing and supply chain, sales and marketing and clinical trial operations and could have an adverse impact on our business and our financial results.

If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our overall financial condition.

If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our overall financial condition, results of operations and cash flows.

We could face financial liability from product liability claims if the use of our products results in significant loss or injury.

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However, a substantial future product liability claim could exceed the amount of insurance coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect our overall future financial condition.

In recent years, a discovery of Bovine Spongiform Encephalopathy (“BSE”), which is commonly referred to as “Mad Cow Disease”, has caused concern among the general public.

Several years ago, a discovery of Bovine Spongiform Encephalopathy (“BSE”), which is commonly referred to as “Mad Cow Disease”, has caused concern among the general public.

As a result, some countries have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified.

We have changed the vast majority of our capsules to a vegetable base.

We have changed many of our capsules to a vegetable base.

However, if a vegetable base is not available or practical for use, certifications are required to ensure the capsule material is BSE-free.

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Concentration Risk

A significant portion of our revenue is derived from our Ambrotose Life ® , Advanced Ambrotose ® , TruHealth ™ , Manapol ® Powder, and GI-Pro products.

A significant portion of our revenue is derived from our Ambrotose Life ® , TruHealth ™ , Advanced Ambrotose ® , Optimal Support Packets, and GI-Pro products.

A decline in sales value of such products could have a material adverse effect on our earnings, cash flows, and financial position.

Revenue from these products were as follows for the years ended December 31, 2020 and 2019 (in thousands, except percentages) :

product % of total

net sales Sales by

product % of total

Ambrotose Life ®

$ 36,066 23.8 % $ 34,975 22.2 %

16,263 10.7 % 16,193 14.2 %

Advanced Ambrotose ®

Manapol ® Powder

GI-Pro Balance

14,662 9.7 % 22,390 10.3 %

Optimal Support Packets 7,996 5.3 % 4,110 2.6 %

GI-Pro (MicroBiome) 7,513 5.0 % 6,559 4.2 %

Total $ 82,500 54.5 % $ 84,227 53.5 %

Our business is not currently exposed to customer concentration risk given that no independent associate has ever accounted for more than 10% of our consolidated net sales.

If we incur substantial liability from litigation, complaints, or enforcement actions or incur liabilities or penalties resulting from misconduct by our independent associates, our financial condition could suffer.

Routine enforcement actions and complaints are common in our industry.

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We cannot predict these economic conditions or the impact they would have on our consumers or business.

If our international markets are not successful, our business could suffer.

We currently sell our products in the international markets of Canada, Mexico, Colombia, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, Netherlands, Norway, South Africa, Spain, Sweden, the United Kingdom, Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong and China.

We operate in China on a non-direct selling business model instead of our traditional network marketing model.

In China, multi-level marketing is prohibited by the Prohibition of Pyramid Selling and direct selling without a license is prohibited by the Regulation on the Administration of Direct Sales.

Our international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs.

If we do not adequately address such issues, our international markets may not meet growth expectations.

Our international operations and future expansion plans are subject to political, economic, and social uncertainties, including:

the renegotiation or modification of various agreements;

increases in custom duties and tariffs;

changes and limits in export controls;

and foreign laws, treaties and regulations, including without limitation, tax laws, the U.S.

Foreign Corrupt Practices Act (“FCPA”), and similar anti-bribery and corruption acts and regulations in many of the markets in which we operate;

trademark availability and registration issues;

changes in exchange rates;

changes in taxation;

wars, civil unrest, acts of terrorism and other hostilities;

political, economic, and social conditions;

the effects of COVID-19;

changes to trade practice laws or regulations governing direct selling and network marketing;

increased government scrutiny surrounding direct selling and network marketing;

changes in the perception of network marketing;

risk of our independent associates offering business opportunities in China.

The risks outlined above could adversely affect our ability to sell products, obtain international customers, or to operate our international business profitably, which would have a negative impact on our overall business and results of operations.

Furthermore, any negative changes in our distribution channels may force us to invest significant time and money related to our distribution and sales to maintain our position in certain international markets.

Adverse or negative publicity could cause our business to suffer.

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• skeptical consumers;

• competitors;

• the safety and quality of our products and/or our ingredients;

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Additionally, many of the international countries in which we operate have proposed or enacted laws or regulations on the appropriate use and disclosure of financial and personal data.

The European Union (“EU”) adopted the General Data Protection Regulation (“GDPR”) on April 27, 2016.

The EU adopted the General Data Protection Regulation (“GDPR”) on April 27, 2016.

The GDPR went into effect on May 25, 2018.

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Although we maintain policies and processes surrounding the protection of sensitive data, which we believe to be adequate, there can be no assurances that we will not be subject to such claims in the future.

We rely upon our existing cash balances and cash flow from operations to fund our business and meet our contractual obligations.

In the event that we do not generate adequate cash flow from operations, we will need to raise money through a debt or equity financing, if available, or curtail operations.

The adequacy of our cash resources to continue to meet our future operational needs depends, in large part, on our ability to increase product sales and/or reduce operating costs and some of these costs are fixed contractual obligations.

As of December 31, 2020 and 2019, cash and cash equivalents held in bank accounts in foreign countries totaled $18.6 million and $18.2 million, respectively.

We maintain supply agreements with our suppliers and manufacturers.

Certain of our supply agreements contain exclusivity clauses for the supply of certain raw materials and products, some of which are conditioned upon compliance with minimum purchase requirements.

One of our supply agreements, under which the supplier provides us with certain aloe vera-based raw materials, requires us to purchase raw materials in an aggregate amount of $7.8 million through 2022.

Failure to satisfy minimum purchase requirements could result in the loss of exclusivity, which could adversely affect our business.

If we are unsuccessful in generating positive cash flow from operations, we could exhaust our available cash resources and be required to secure additional funding through a debt or equity financing, transfer cash in a manner that could be taxed, significantly scale back our operations, and/or discontinue many of our activities, which could negatively affect our business and prospects.

Additional funding may not be available or may only be available on unfavorable terms.

Risks Related to Our International Operations

If our international markets are not successful, our business could suffer.

We currently sell our products in the international markets of Canada, Mexico, Austria, the Czech Republic, Denmark, Estonia, Finland, Germany, the Republic of Ireland, Namibia, Netherlands, Norway, South Africa, Spain, Sweden, the United Kingdom, Australia, Japan, New Zealand, the Republic of Korea, Singapore, Taiwan, Hong Kong and China.

We operate in China on a non-direct selling business model instead of our traditional network marketing model.

In China, multi-level marketing is prohibited by the Prohibition of Pyramid Selling and direct selling without a license is prohibited by the Regulation on the Administration of Direct Sales.

Our international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs.

If we do not adequately address such issues, our international markets may not meet growth expectations.

Our international operations and future expansion plans are subject to political, economic, and social uncertainties, including:

• the renegotiation or modification of various agreements;

• increases in custom duties and tariffs;

• changes and limits in export controls;

• complex U.S.

and foreign laws, treaties and regulations, including without limitation, tax laws, the U.S.

Foreign Corrupt Practices Act, and similar anti-bribery and corruption acts and regulations in many of the markets in which we operate;

• trademark availability and registration issues;

• changes in exchange rates;

• changes in taxation;

• wars, civil unrest, acts of terrorism and other hostilities;

• political, economic, and social conditions;

• the effects of COVID-19;

• changes to trade practice laws or regulations governing direct selling and network marketing;

• increased government scrutiny surrounding direct selling and network marketing;

• changes in the perception of network marketing;

• risk of our independent associates offering business opportunities in China.

Currency exchange rate fluctuations could reduce our overall profits.

For the year ended December 31, 2020, we recognized 77.7% of net sales in markets outside of the United States and 70.3% in markets outside of the Americas.

For the year ended December 31, 2019, we recognized 76.6% of net sales in markets outside of the United States and 69.6% in markets outside of the Americas.

In preparing our consolidated financial statements, we are required to translate certain financial information from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate.

If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate.

For example, while our 2020 net sales declined 2.7% on a Constant dollar basis (see Item 7, Non-GAAP Financial Measures ), unfavorable foreign exchange caused a $2.1 million decrease in GAAP net sales as compared to 2019.

In other words, 2020 sales would have been $2.1 million higher than the reported value, except for the impact of foreign exchange.

There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, assets, financial condition, liquidity, results of operations or cash flows.

We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations.

To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.

The spread of COVID-19 underscores certain risks we face, and the rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19.

On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19.

The spread of COVID-19 underscores certain risks we face in our business that are described in this Annual Report on Form 10-K.

Governmental and non-governmental organizations may not effectively combat the spread and severity of COVID-19, which could adversely impact our profitability.

The adverse economic effects of COVID-19 may materially decrease demand for our products based on changes in consumer behavior or the restrictions in place by governments trying to curb the outbreak.

For example, we rescheduled in-person corporate sponsored events in 2020 and opted to hold virtual events.

In many cases, our associates canceled in-person sales meetings and utilized online platforms to meet virtually.

We have held virtual company sponsored events in early 2021, and while we hope to hold corporate sponsored in-person events later in 2021, we are prepared to transition those planned in-person events to virtual events.

The continued uncertainty regarding the spread and duration of the COVID-19 pandemic, including the multiple new variants of the virus that causes COVID-19, could lead to adverse impacts on our sales in fiscal year 2021 and our overall liquidity.

The spread of COVID-19, or actions taken to mitigate this spread, could have material and adverse effects on our ability to operate effectively, including as a result of the complete or partial closure of certain businesses and the inability of our associates to market our products as a result of “shelter-in-place” and similar policies that may be implemented in an effort to mitigate the spread of COVID-19.

Furthermore, the outbreak of COVID-19 has severely impacted global economic activity, and caused significant volatility and negative pressure in the financial markets.

We experienced challenges in getting raw materials and ingredients to our contract manufacturers and finished products to our distribution centers resulting from reductions in global transportation capacity.

The fluidity of this situation precludes any prediction as to the ultimate adverse impact to us of COVID-19.

We are continuing to monitor the spread of COVID-19 and related risks.

The magnitude and duration of the pandemic and its impact on our business, results of operations, financial position, and cash flows is uncertain as this continues to evolve globally.

However, if the spread continues on its current trajectory, such impact could grow and our business, results of operations, financial position, and cash flows could be materially adversely affected.

Risks Related to Regulation

Network marketing is always subject to extensive governmental regulations, including foreign, federal, and state regulations.

Any change in legislation and regulations could affect our business.

Furthermore, significant penalties could be imposed on us for failure to comply with various statutes or regulations.

Violations may result from :

• ambiguity in statutes;

• regulations and related court decisions;

• the discretion afforded to regulatory authorities and courts interpreting and enforcing laws;

• new regulations affecting our business;

• changes to, or interpretations of, existing regulations affecting our business.

level marketing.

The FTC has broad enforcement authority and, while it issues guidance on how it interprets the applicable law, that guidance is not ultimately binding on the FTC.

As a result, the FTC could decide to investigate or bring an enforcement action regarding practices that we interpret to be in line with applicable law and/or FTC guidance.

For example, the FTC has challenged the distributor compensation plans used by other multi-level-marketing companies over the last few years.

The FTC obtained consent decrees with those companies requiring those companies to (i) discontinue using all, or certain components of, their compensation plans;

and (ii) implement a compensation plan that received prior approval from the FTC.

In 2019, the FTC continued to challenge compensation plans and structures within the direct selling channel.

FTC determinations such as these have created ambiguity regarding the proper interpretation of the law and regulations applicable to direct selling companies, and in particular, companies that use a multi-level-marketing business model, in the United States.

While a consent order between the FTC and a specific company does not represent judicial precedent and is not legally binding on other companies, FTC officials have indicated that companies within the direct selling channel should look to these consent orders for guidance.

Additionally, while communications and guidance from the FTC to the direct selling channel in 2019 and 2018 reinforce the principles contained in these consent orders, these communications have also created ambiguity and uncertainty regarding the proper interpretation of the laws, regulations and judicial precedent applicable to direct selling in the United States.

We continue to analyze the consent orders, guidance and other communications issued by the FTC.

Although we strive to ensure that our overall business model and compensation plans are regulatory compliant in each of our markets, we cannot assure you that a regulator, if it were to review our business, would agree with our assessment and would not require us to change one or more aspects of our operations.

Any action against us in the future by the FTC or another regulator could materially and adversely affect our operations.

We cannot predict what effect additional governmental regulations, judicial decisions, or administrative orders, when and if promulgated, would have on our business.

Failure by us, or our associates, to comply with these laws, regulations, or guidance, could have a material adverse effect on our business in a particular market or in general.

Finally, the continuation of regulatory challenges, investigations and litigation against other direct selling companies could harm our business and the direct selling channel if the laws and regulations are interpreted in a way that results in additional restrictions on direct selling companies in genera l.

We sell our products worldwide to a sales force of independent associates.

However, independent associates may from time to time, without our knowledge and in violation of our policies, make non-compliant statements, create promotional materials, or otherwise provide information that does not accurately describe our products or marketing program.

There is a possibility that some jurisdictions could seek to hold us responsible for independent associate activities that violate applicable laws or regulations, which could result in government or third-party actions or fines against us, which could harm our financial condition and operating results.

For example, Meitai does not operate as a direct selling company in mainland China and does not hold a direct selling license in China.

Additionally, direct selling regulations in China prevent persons who are not Chinese nationals from engaging in direct selling in China.

We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating results.

In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar social taxes with respect to our distributors.

In the event that local laws and regulations require us to treat our independent distributors as employees, or if our distributors are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and/or related social taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.

Challenges by private parties to the form of our network marketing system could harm our business.

We may be subject to challenges by private parties, including our independent associates and preferred customers, to the form of our network marketing system or elements of our business.

We have adopted rules and policies based on case law, rulings of the FTC, discussions with regulatory authorities in several states, and domestic and global industry standards.

As a member of the U.S.

On January 4, 2019, the DSA established a third party self-regulatory program to be administered by the Council of Better Business Bureaus.