What changed in this filing

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Item 1A. Risk Factors

2023-03-17 compared with 2022-03-15 · 50 added, 41 removed, 438 unchanged (17% of the section changed)

33 unchanged sentences

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.

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

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

Together, our commissions and incentives range approximately from 35% to 43% of our consolidated net sales.

Together, our commissions and incentives range from 35% to 43% of our consolidated net sales.

We closely monitor the amount of commissions and incentives as a percentage of net sales and may periodically adjust our compensation plan to better manage these costs.

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• our Ambrotose ® complex, a glyconutritional dietary supplement ingredient consisting of a blend of monosaccharides, or sugar molecules, used in the majority of our products;

• the MTech AO Blend ® formulation, our proprietary antioxidant technology used in the Ambrotose AO ® complex;

• the MTech AO Blend ® formulation, our proprietary antioxidant technology used in the Ambrotose AO ® product;

• a compound used in our reformulated Advanced Ambrotose ® complex that allows for a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe.

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, 2021, we had 11 patents for the technology relating to our Ambrotose ® formulation, all of which were issued, granted, and validated in 10 foreign jurisdictions.

As of December 31, 2022, we had 11 pat ents 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 four 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 we do not introduce new products or make enhancements to meet the changing needs of our independent associates and preferred customers in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition, and operating results.

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

If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a timely fashion or fail to comply with our product safety and quality standards or applicable law, our business could suffer.

Outside manufacturers produce all of our products.

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However, the failure of our primary suppliers or manufacturers to supply ingredients or produce our products could adversely affect our business operations.

We believe we have dependable suppliers for all of our ingredients and we have identified alternative sources for all of our ingredients, except Arabinogalactan and Manapol ® powder.

Due to the unique nature of each ingredient, important components used in the formulation of our Ambrotose ® complex, we are unable to identify an alternative supplier at this time.

If our suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect our business.

We believe we have dependable third-party manufacturers.

Our business depends in large part on our ability to maintain consumer confidence in the safety and quality of our products.

We have rigorous product safety and quality standards, which we expect our third-party contract manufacturers to meet.

However, despite our commitment to product safety and quality, our contract manufacturers may not always meet these standards, particularly as we expand our manufacturing operations and product offerings.

Further, our manufacturing operations are subject to numerous regulations, including food and drug, environmental, and labor regulations, which continue to expand and evolve and require substantial expenditures.

If our contract manufacturers fail to comply with our product safety and quality standards or applicable law, or if our products are or become contaminated, damaged, adulterated, mislabeled, or misbranded, whether caused by us or someone in our supply chain or events outside of our or their control, we may be required to undertake costly remediation efforts, which may include product recalls, formulation changes, the destruction of inventory, and supply chain interruption, and may become subject to negative publicity, regulatory action or fines, and product liability claims, which could materially harm our reputation, business, financial condition, and operating results.

The loss of suppliers or shortages of raw materials could have an adverse effect on our business, financial condition, or results of operations.

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There can be no assurance that suppliers will be able to provide our contract manufacturers the raw materials in the quantities and at the appropriate level of quality that we request or at a price that we are willing to pay.

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.

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

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.

1 unchanged sentence

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 and other logistical issues within the supply chain.

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.

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 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.

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Concentration Risk

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

A significant portion of our revenue is derived from our Ambrotose Life ® , TruHealth ™ , Advanced Ambrotose ® , Manapol® Powder and Optimal Support Packets.

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

6 unchanged sentences

15,730 11.5 % 18,010 11.3 %

Manapol ® Powder

13,141 8.2 % 7,187 4.7 %

Advanced Ambrotose ®

9,624 7.0 % 11,158 7.0 %

GI-Pro (MicroBiome) 8,478 5.3 % 7,513 5.0 %

Manapol ® Powder

7,909 5.8 % 13,141 8.2 %

Optimal Support Packets 6,916 5.0 % 7,593 4.7 %

Total $ 68,913 50.2 % $ 78,678 49.2 %

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Our failure or inability to comply with data protection regimes domestically and in foreign countries could result in fines, penalties, injunctions, or material litigation expenditures.

With increased frequency i n recent years, cyber-attacks against companies have resulted in breaches of data security.

With increased frequency in recent years, cyber-attacks against companies have resulted in breaches of data security.

Our business requires the storage and transmission of suppliers’ data and our independent associates’ and customers’ personal, credit card, and other confidential information.

37 unchanged sentences

In February 2022, following Russia’s invasion of Ukraine, the U.S.

and the European Union imposed various economic sanctions against Russia.

and the EU imposed various economic sanctions against Russia.

If Russia responds with retaliatory measures such as restrictions on the sale of oil or other energy resources from Russia to other countries in the region, that could result in an increase in our global shipping expenses, reduce our sales, or otherwise have an adverse effect on our European operations.

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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 2021 net sales increased 3.1% on a Constant dollar basis (see Item 7, Non-GAAP Financial Measures ), favorable foreign exchange caused a $3.7 million increase in GAAP net sales as compared to 2020.

In other words, 2021 sales would have been $3.7 million lower than the reported value, except for the impact of foreign exchange.

For example, our 2022 net sales decreased 7.6% on a Constant dollar basis (see Item 7, Non-GAAP Financial Measures ), and unfavorable foreign exchange caused a $10.5 million decrease in GAAP net sales as compared to 2021.

In other words, 2022 sales would have been $10.5 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.

8 unchanged sentences

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 2022, we are prepared to transition those planned in-person events to virtual events.

The majority of our events in 2022 were held virtually and those events that were in-person had much lower attendance as compared to similar meetings prior to the pandemic.

While we do plan to hold corporate sponsored in-person events in 2023, 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 2023 and our overall liquidity.

The spread of COVID-19, or actions taken to mitigate this spread domestically and in our international markets, 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.

Notwithstanding the relaxation of pandemic-related constraints in certain markets, considerable uncertainty remains surrounding the potential effects and the effectiveness of government initiatives to contain the spread of COVID-19 domestically and in our international markets, could continue to have material and adverse effects on our ability to operate effectively.

Our ability and the ability of our independent associates to conduct business remains constrained in some of our key markets due to partial closure of certain businesses and the inability of our associates to market our products as a result of lockdowns and similar policies that may be implemented in an effort to mitigate the spread of COVID-19.

Furthermore, the outbreak of COVID-19 continues to impact global economic activity, and has 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.

14 unchanged sentences

• 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.

On January 4, 2018, 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.

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

On October 28, 2021, the Company received a letter from the Federal Trade Commission (“FTC”) regarding “Notices of Penalty Offenses Concerning Money-Making Opportunities and Endorsement and Testimonials." The Company was among 1,100 other companies to receive the letter which put companies on notice that they should be aware of what constitutes false or misleading income, earning, or product claims.

On October 28, 2021, the Company received a letter from the FTC regarding “Notices of Penalty Offenses Concerning Money-Making Opportunities and Endorsement and Testimonials." The Company was among 1,100 other companies to receive the letter which put companies on notice that they should be aware of what constitutes false or misleading income, earning, or product claims.

As the FTC made clear in the letter, receipt of the letter is not a determination of wrongdoing.

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The letter is the first step in a process for the FTC to impose “civil monetary penalties of up to $43,792 per violation.” Nearly all Direct Selling Association (“DSA”) member companies received the notice along with non-members of the DSA in the direct selling channel, gig companies, franchise companies, and other companies offering business opportunities.

In March 2022 the FTC issued an Advanced Notice of Public Rulemaking:

Trade Regulation Rule on the Use of Earnings Claims that proposes to regulate how the Company and its associates advertise and represent the business.

Additionally, in November 2022, the FTC issued an Advanced Notice of Public Rulemaking regarding changes to the Business Opportunity Rule, which requires business opportunity sellers to give prospective buyers specific information to help evaluate a business or work-from-home opportunity.

As a direct selling company, we are currently exempt from the Business Opportunity Rule.

A potential rule on the use of earnings claims by us or our independent associates or an expansion of the business opportunity rule to include direct selling companies could have a negative effect on our business by requiring burdensome administrative disclosure obligations that could prevent individuals from engaging in our business.

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

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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.

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.

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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.

While MK has refined how incentive rewards are included in overall compensation for its associates in Korea in response to discussions with KFTC officials, no fines or sanctions were proposed in the report and on March 17, 2020, MK received notice that the KFTC commissioners accepted the recommendation in the Examiner's Report.

While neither the Company nor MK anticipate any further issues related to this particular matter, we cannot currently predict whether or not MK will be subject to similar or other audits in the future.

A negative outcome of any future audits 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.

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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.

We met with the FDA and believe our response met their concerns.

To date, we have not received any further inquiries from the FDA.

On May 4, 2022, the Company received notice from its customs broker that the FDA held, inspected, and took samples for testing from shipments imported from Costa Rica of its Ambrotose Life ® and Ambrotose ® Complex products.

We cooperated with the FDA and supplied requested documentation from our third-party manufacturer.

The products were eventually released with the exception of one lot of Ambrotose Life ® powder which was denied entry.

There was an inconsistency in the results obtained by the FDA as compared to the results obtained by both the manufacturer and two independent labs engaged by the Company to conduct testing.

Additionally, we engaged a food-safety expert to analyze the testing results.

The third-party testing results were all within established specifications and at levels customarily seen with raw botanical powders.

In addition to the extensive testing and analysis completed by the Company, the food safety expert reviewed FDA’s test results, the two third-party labs’ test results, and the documentation and testing from our manufacturer.

The expert’s report was included as an exhibit to the Company’s response to the FDA.

The expert’s report concluded that the Company’s analytical data from samples of the same lot that the FDA tested, supported a conclusion favoring the Company’s results.

However, on February 9, 2023, we received notice that the FDA was refusing admission of the product.

We scheduled return of that lot to the manufacturer.

On October 3, 2022, the Company received notice that the Ambrotose Life ® powder product was being detained due to a labeling issue asserting that there are formatting issues on the supplement facts panel.

The formatting issues, which have been corrected, centered on stating “O g” or “0%” instead of “< 1g” or less than “< 1%” for sugar and sodium, respectively.

We were also asked to remove the statement, “Not a significant source of saturated fat, trans fat, cholesterol, protein, vitamin D, calcium, or iron.”

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

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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”).

Additionally, on December 21, 2015, the FDA created the 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.

84 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors