Item 1. Business
General
USANA Health Sciences, Inc., a Utah corporation, was founded in 1992 by Myron W. Wentz, Ph.D. We develop and manufacture high-quality,
science-based nutritional and personal care products with a primary focus on promoting long-term health and reducing the risk of chronic degenerative disease. In so doing, we are committed to
continuous product innovation and sound scientific research. We have operations in 20 markets worldwide, where we distribute and sell our products by way of direct selling. We have chosen the direct
selling distribution method as we believe it is the most conducive to meeting our vision as a company, which is improving the overall health and nutrition of individuals and families around the world.
Our net sales in fiscal year 2016 were $1.006 billion, of which 87.0% were in markets outside of the United States. As a U.S.-based multi-national company with an expanding international
presence, our operating results are sensitive to currency fluctuations, as well as economic and political conditions in markets throughout the world. Additionally, we are subject to the various laws
and regulations in the United States, China, and the other markets in which we operate with respect to the products that we sell and to our method of distribution.
Our
customer base comprises two types of customers: "Associates" and "Preferred Customers." Associates share in our company vision by acting as independent distributors of our products
in addition to purchasing our products for their personal use. Preferred Customers purchase our products strictly for personal use and are not permitted to resell or to distribute the products. As of
December 31, 2016, we had 471,000 active Associates and 93,000 active Preferred Customers worldwide.
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Current Focus and Recent Developments
We have implemented the following strategies and initiatives to increase the number of Associates and Preferred Customers who use our products
throughout the world and, thereby, further our company vision:
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Personalization:
Over the last few years, we have focused heavily on
personalizing and improving our customers' experience with USANA. Personalization will continue to be one of our key strategies in 2017 as we continue to further personalize each of our product lines.
In
August 2016, we introduced one of the greatest product innovations in our history with the launch of our Incelligence product platform. Incelligence is USANA's
proprietary, patent-pending, technology that is designed to support the body's natural ability to nourish, protect and renew itself. As part of our Incelligence platform, we also launched
our new flagship multivitamin, CellSentials.
In
August 2015, we introduced our new "MySmart
TM
Foods" line of products, which continues our philosophy and strategy of personalization. MySmart
TM
Foods are science-based,
healthy nutrition shakes, bars, boosters and flavor optimizers. We made MySmart
TM
Foods available to our Associates for a limited time at our 2015 International Convention only, as a
pre-launch opportunity to purchase and try the products. Following that, we officially launched MySmart
TM
Foods during the first half of 2016. While MySmart
TM
Foods offer
optimal nutrition and personalization, the launch and reception of these products have not met our expectations. Accordingly, our team is in the process of evaluating and enhancing the
MySmart
TM
Foods product line so that we can fully deliver on our vision of these personalized healthy foods.
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Market-Specific Strategies:
We have implemented market-specific strategies
to facilitate growth and strengthen our business around the world.
During
the fourth quarter of 2016, we began to again offer short-term incentives and promotions in each of our markets around the world, with an emphasis on China, to generate excitement and customer
growth. Prior to the fourth quarter, we did not offer any significant short-term incentives during 2016 as we focused on (i) our Incelligence and MySmart
TM
Foods
product launches, and (ii) the completion of, and transition to, our new manufacturing facility in China. Market-specific incentives have been an important part of our business in the past and
in 2017, we will continue to offer short-term incentives to drive customer growth around the world, but will follow a measured approach to ensure that we continue to manage our Associate incentives
expense.
In
2016, we continued our strategy to increase our brand-recognition to make it easier for our Associates to introduce USANA to customers. In this regard, we continued our relationship with
Dr. Mehmet Oz as a Trusted Partner and Sponsor of
The Dr. Oz Show
. While this partnership is focused on our North America region, it is
intended to increase awareness and recognition of the USANA brand in our other regions as well. Under this partnership, USANA products are regularly featured on
The
Dr. Oz Show
and viewers of the show are able to purchase USANA products via a direct link on
The Dr. Oz Show
website.
Additionally,
in 2016 we continued to expand our international brand ambassador and athlete sponsorship program. Under this program, USANA is designated as the exclusive supplement provider for over
1,000 elite athletes around the world. These athletes compete at the highest levels and represent the USANA brand.
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Product Innovation, Information Technology and Infrastructure:
In 2016, we
continued our investments in product innovation, information technology and infrastructure to further our Company vision, continue to improve our customers' experience with us, and to prepare to
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become
a larger company. These investments led to our successful execution of a number of strategies in 2016, including our Incelligence and MySmart
TM
Foods product launches,
as well the successful completion of our manufacturing facility in China. In 2017, we will continue to invest in these areas to drive our initiatives and these investments will be reflected as both
additional SG&A expense and capital expenditures.
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International Development and Expansion:
Given the significant opportunity
that exists in China, we plan to continue focusing significant time and resources on growing this market. Additionally, we continue to believe that significant growth opportunities exist in new
international markets and our management team will continue to evaluate markets for USANA's business. Fiscal 2016 was the first full-year of operations for USANA in Indonesia and we continue to
believe that this market offers a promising long-term growth opportunity for us.
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-
Preferred Customer Growth Initiatives:
We plan to execute certain
initiatives to generate growth in the number of Preferred Customers using our products. We will begin rolling out these initiatives in 2017 through the launch of a new Preferred Customer Invitation
Program. Going forward, we also plan to offer new Preferred Customer rewards programs and loyalty programs.
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Products
The following table summarizes our product lines.
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Product Line/Category
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Description
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Percent of
Product Sales
by Fiscal Year
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Product examples
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USANA® Nutritionals
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Essentials
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Includes core vitamin and mineral supplements that provide a foundation of advanced total body nutrition for every age group
beginning with children 13 months of age.
|
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201424%
201522%
201620%
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USANA® CellSentials
Essentials
HealthPak 100
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Optimizers
|
|
Consists of targeted supplements designed to meet individual health and nutritional needs. These products support needs such
as cardiovascular health, skeletal/structural health, and digestive health and are intended to be used in conjunction with the Essentials.
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201455%
201559%
201663%
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Proflavanol
CoQuinone® 30
BiOmega-3
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Foods
|
|
Includes low-glycemic meal replacement shakes, snack bars, and other related products that provide optimal macro-nutrition
(complex carbohydrates, complete proteins, and beneficial fats) in great tasting and convenient formats. These products can be used along with Essentials and Optimizers to provide a complete and healthy diet and sustained energy throughout the
day.
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201413%
201511%
201610%
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MySmartFoods
Nutrimeal
Fibergy
RESET weight-management program
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Sensébeautiful science®
|
|
Includes premium, science-based, personal care products that support healthy skin and hair by providing advanced topical
nourishment, moisturization, and protection. These products are designed to complement inner nutrition for the skin provided by the USANA Nutritionals and are manufactured with our patented, self-preserving technology, which uses a unique blend of
botanicals, antioxidants, and active ingredients to keep products fresh, without adding traditional chemical preservatives.
|
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20147%
20157%
20166%
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Daytime Protective Emulsion
Night Renewal
Perfecting Essence
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All Other
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Includes materials and online tools that are designed to assist our Associates in building their businesses and in marketing
our products.
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20141%
20151%
20161%
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Associate Starter
Kit Product Brochures
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In
addition to the products described above, we offer products designed specifically for prenatal, infant, and young-child age groups in China. As we continue to focus on personalization
and innovation, we will look for innovative product opportunities such as our Incelligence and MySmart
TM
Foods products, which were launched in 2016.
The
approximate percentage of total product sales represented by our top-selling products for the last three fiscal years is as follows:
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Year Ended
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2014
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2015
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2016
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Key Product
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USANA® Essentials/CellSentials
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16
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%
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14
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%
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14
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%
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Proflavanol®
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13
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%
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13
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%
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13
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%
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BiOmega-3
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10
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%
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12
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%
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13
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%
|
Other
top-selling products include our HealthPak 100 and CoQuinone ® 30.
Geographic Presence
Our products are distributed and sold in 20 markets. We have organized our markets into two geographic regions: (i) Asia Pacific, which
includes three sub-regions, and (ii) Americas and Europe, as noted below.
Asia Pacific
Asia Pacific is organized into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. Markets included in each of these
sub-regions are as follows:
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Greater ChinaHong Kong, Taiwan, and China(1)
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Southeast Asia PacificAustralia, New Zealand, Singapore, Malaysia, the Philippines, Thailand and Indonesia(2)
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North AsiaJapan and South Korea
Asia
Pacific has driven our growth the last several years. Our most recent market expansions in this region include our entry into Indonesia in late 2015. Since our acquisition of
BabyCare in 2010, our strategy in Asia Pacific has been centered on generating growth in China. Consequently, our growth in Asia Pacific over the last few years has been led by China, and we believe
that China will continue to
drive our growth in this region going forward. We also expect our business to grow in most of our other markets in this region.
Americas and Europe
Americas and Europe is our most mature region and has grown modestly on a constant currency basis over the last several years due to sales and
customer growth in Canada and Mexico. We have not, however, generated sales and customer growth in the United States over the last several years. We continue to implement growth strategies in the
United States and remain optimistic about our potential to generate growth in this market.
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(1)
-
Our
business in China is that of BabyCare Holdings, Ltd. ("BabyCare"), our wholly-owned subsidiary.
-
(2)
-
We
commenced operations in Indonesia in the fourth quarter of 2015.
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Because we have operations in multiple markets, with sales and expenses being generated and incurred in multiple currencies, our reported U.S. dollar sales and
earnings can be significantly affected by fluctuations in currency exchange rates. In general, our operating results are affected positively by a weakening of the U.S. dollar and negatively by a
strengthening of the U.S. dollar. In 2016, net sales outside of the United States represented approximately 87.0% of consolidated net sales.
Net Sales by Region
The following table shows net sales by geographic region for our last three fiscal years. We report net sales in a geographic region if a
product shipment originates in that geographic region. Additional financial information relating to our geographic regions can be found in Note K to the Consolidated Financial Statements
included in this report.
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2014
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2015
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2016
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(in thousands)
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Asia Pacific
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Greater China
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$
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326,134
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41.3
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%
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$
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441,284
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48.0
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%
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$
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502,299
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49.9
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%
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Southeast Asia Pacific
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177,940
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22.5
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%
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183,828
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20.0
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%
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206,124
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20.5
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%
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North Asia
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32,667
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4.1
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%
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39,751
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4.4
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%
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46,023
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4.6
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%
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Asia Pacific Total
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536,741
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67.9
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%
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664,863
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72.4
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%
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754,446
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|
75.0
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%
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Americas and Europe
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253,730
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32.1
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%
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253,636
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|
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27.6
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%
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|
251,637
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25.0
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%
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$
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790,471
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100.0
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%
|
$
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918,499
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|
|
100.0
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%
|
$
|
1,006,083
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100.0
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%
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Research and Development
Our research and development efforts are focused on developing and launching high-quality, science-based products that promote long-term health
and reduce the risk of chronic degenerative disease. Our research and development activities include developing products that are new to USANA and new to the industry, updating existing USANA brand
formulas to keep them current with the latest science, and adapting existing formulas to meet ever-changing regulations in new and existing international markets. The R&D team is also involved in
protecting our proprietary position with both exclusive ingredients, and patent protection. We filed three new U.S. patent applications on our Incelligence platform and
CellSentials formulation in 2016. Additional research support for this technology is underway. In addition, we have an ongoing clinical study in place to verify the efficacy of our
existing products and our new formulations. Our scientific staff includes experts on human nutrition, cellular biology, biochemistry, genetics, the microbiome, natural product chemistry, and clinical
research. These experts continually review the latest published research on nutrition, attend scientific conferences, and work with a number of third-party research institutions and researchers to
identify possible new products and opportunities and also to reformulate our existing products.
Our
in-house research team is working closely with scientists at a number of universities and top research institutes, including the University of Washington, the University of Texas,
the University of Colorado Health Sciences Center in Denver, Utah State University, the University of Utah, the Linus Pauling Institute at Oregon State University, The Foods for Health Institute at
The University of California, Davis, McGill University in Montreal, Canada, and The Orthopedic Specialty Hospital ("TOSH") in Salt Lake City, Utah, to maintain our leadership in clinical research in
nutrition, oxidative stress, glycemic stress, chronic inflammation and health implications of the microbiome.
We
follow pharmaceutical standards established by the U.S. Pharmacopeia and other pharmacopeias in the development and formulation of our products. Our ingredients are selected to meet a
number of criteria, including, but not limited to: safety, potency, purity, stability, bio-availability, and efficacy. We control the quality of our products beginning at the formulation stage, and we
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maintain
our quality control through controlled sourcing of raw ingredients, manufacturing, packaging, and labeling. In fiscal years 2014, 2015, and 2016, we expended $5.1 million,
$6.4 million, and $8.8 million, respectively, on product research and development activities. Going forward, we expect to increase our spending and resources for research and development
in connection with our personalization and product innovation strategies.
Manufacturing and Quality Assurance
We conduct nearly all of the manufacturing, production and quality control operations for our nutritional and personal care products in-house.
We have established and maintain a manufacturing and quality control facility in Salt Lake City, Utah. BabyCare manufactures and produces nearly all of its products in-house and maintains
manufacturing and quality control facilities in Beijing, China and Tianjin, China. Additional information about our manufacturing, production and quality control operations is set out below.
Tablet Manufacturing
Our tablet production process uses automatic and semi-automatic equipment and includes the following activities: auditing and qualifying
suppliers of raw materials, acquiring raw materials, analyzing raw material quality, weighing or otherwise measuring raw materials, mixing raw materials into batches, forming mixtures into tablets,
coating and sorting the tablets, analyzing tablet quality, packaging finished products, and analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and
finished products for purity, potency, and composition to determine whether our products conform to our internal specifications, and we maintain complete documentation for each of these tests. We
employ a qualified staff of professionals to develop, implement and maintain a quality system designed to assure that our products are manufactured to our internal and applicable regulatory agency
specifications.
Our
Salt Lake City manufacturing facility is registered with the U.S. Food and Drug Administration ("FDA"), Health Canada Natural Health Products Directorate, the Australian Therapeutic
Goods Administration ("TGA"), and other governmental agencies, as required. This facility is audited regularly by various organizations and government agencies to assess, among other things,
compliance with current Good Manufacturing Practices ("GMPs") and with labeling claims. Additionally, our Salt Lake
City manufacturing facility is also certified, through inspection and audits, with the Islamic Foods and Nutrition Counsel of America in compliance with Halal, NSF International in compliance with
product testing and GMPs, and the TGA in compliance with the current Therapeutic Goods Act in Australia.
The
manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs
and pharmaceutical GMPs, with additional requirements that are specific to dietary supplements. We are audited by the FDA, specifically for dietary supplements, and have been found in full compliance
with GMPs for dietary supplements.
Our
Beijing, China manufacturing facility is registered with the China Food and Drug Administration ("CFDA"), and other governmental agencies, as required. This facility is audited
regularly by various organizations and government agencies to assess, among other things, compliance with GMP's, and with labeling claims.
Personal Care Manufacturing
The production process for personal care products includes identifying and evaluating suppliers of raw materials, acquiring raw materials,
analyzing raw material quality, weighing or otherwise measuring the raw materials, mixing raw materials into batches, analyzing liquid batch quality, packaging finished
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products,
and analyzing finished product quality. We conduct sample testing of raw materials, in-process materials, and finished products for purity, potency, and composition to determine whether our
products conform to our internal specifications, and we maintain complete documentation for each of these tests.
At
our Salt Lake City facility, we have standard technology for producing batches of personal care items, and we have semi-automatic packaging equipment for packaging end products. We
employ qualified staff to develop, implement, and maintain a quality system. Although the FDA has not promulgated GMPs for personal care items, it has issued guidelines for manufacturing personal care
products. We voluntarily maintain compliance with the guidance established by the FDA and the Personal Care Products Council.
Third-Party Suppliers and Manufacturers
We contract with third-party suppliers and manufacturers for the production of some of our products, which account for approximately 33% of our
product sales. These third-party suppliers and manufacturers produce and, in most cases, package these products according to formulations that have been developed by or in conjunction with our
in-house product development team. These products include most of our gelatin-capsulated supplements, Rev3 Energy Drink, Probiotic, our powdered drink mixes, nutrition bars, and certain
of our personal care products. In particular, we have entered into a strategic relationship with a third-party manufacturer of our nutrition bars. Under this relationship we have extended credit to
this supplier in the form of a secured loan to allow the supplier to acquire the necessary equipment to manufacture our bars. This relationship improves our supply chain stability and creates a
mutually beneficial relationship between both parties. Products manufactured by third-party suppliers at their locations must also pass through quality control and assurance procedures to ensure they
are manufactured in conformance with our specifications. We require products manufactured at these facilities to be shipped to USANA, where a quality inspection and release also takes place.
Quality Control/Assurance
We have microbiology and analytical chemistry labs in which we conduct quality control processes. In our microbiology laboratory, scientists
test for biological contamination of raw materials and finished goods. In our analytical chemistry laboratory, scientists test for chemical contamination and accurate levels of active ingredients in
both raw materials and finished products. Both laboratories conduct stability tests on finished products to determine the shelf life of our products. Our Salt Lake City laboratory staff also performs
chemical assays on vitamin and mineral constituents, using U.S. Pharmacopoeia methods and other internally validated methods. In addition to our quality control and clinical laboratories, our
headquarters and China facilities also house a laboratory designated for research and development.
Raw Materials
Most of the raw ingredients that are used in the manufacture of our products are available from a number of suppliers. We have not generally
experienced difficulty in obtaining
necessary quantities of raw ingredients. When supplies of certain raw materials have tightened, we have been able to find alternative sources of raw materials, and believe we will be able to do so in
the future, if the need arises. Our raw material suppliers must demonstrate stringent process and quality control before we use their products in our manufacturing process.
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Distribution and Marketing
General
We distribute our products internationally through a network marketing system, which is a form of person-to-person direct selling. Under this
system, distributors purchase products at wholesale prices from the manufacturer for resale to consumers and for personal consumption. The concept of network marketing is based on the strength of
personal recommendations that frequently come from friends, neighbors, relatives, and close acquaintances. We believe that network marketing is an effective way to distribute our products because it
allows person-to-person product education and testimonials, as well as higher levels of customer service, all of which are not as readily available through other distribution channels.
Structure of Network Marketing Program
Associates.
A person who wishes to sell USANA products must join our independent sales force as an
Associate. A person becomes an Associate by completing an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate's sales
organization. New Associates sign a written contract and agree to adhere to the USANA policies and procedures. Under the policies and procedures, Associates may not, among other things: (i) use
deceptive or unlawful practices to sell USANA products; (ii) make deceptive or unlawful claims or representations concerning our products or Compensation Plan; or (iii) sell competitive
products to other USANA Associates or solicit USANA Associates to participate in other network marketing opportunities. New Associates are required to purchase a starter kit that includes a detailed
manual describing our business and products, as well as our policies and procedures. We sell these kits at a nominal cost averaging $30 in each of our markets. No other investment is required to
become an Associate.
Once
a person becomes an Associate, she or he may purchase products directly from us at wholesale prices for personal use and resale to customers. Our Associates are also entitled to
build sales organizations by attracting and enrolling new Associates and establishing a network of product users. Associates are not required to recruit or sponsor new Associates and we do not
compensate Associates for sponsoring or recruiting Associates. The sponsoring of new Associates results in the creation of multiple levels within our network marketing structure. Sponsored Associates
are referred to as part of the sales organization of the sponsoring Associate. New Associates may also sponsor new Associates, creating additional levels in their network, but also forming a part of
the same sales organization as the original sponsoring Associate. As outlined below, Associates who are interested in earning additional income must successfully sell USANA products and establish a
business network in order to qualify for commissions, including bonuses. Subject to payment of a minimal annual account renewal fee, Associates may continue to distribute or consume our products as
long as they adhere to our policies and procedures.
Individuals
who reside in China and who are interested in being part of USANA's organization in China may do so by joining BabyCare. While the process for joining BabyCare is similar to
the process for joining USANA, individuals who join BabyCare must initially join as a China Preferred Customer, or CPC. CPCs are similar to Preferred Customers in our other markets, but CPC's also
have the right in China to sponsor other CPCs and receive rebates on future product purchases based on the volume of product purchased by CPCs they have sponsored. A CPC may become a direct seller, or
Associate, in China by electing to do so, signing an Associate agreement, and agreeing to adhere to BabyCare's policies and procedures in China. Much like our operations in other markets, an Associate
in China may build a sales organization and receive compensation for product sales. Associates in China are compensated under a compensation plan created and implemented by BabyCare specifically for
China.
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Preferred Customers.
We also sell directly to customers who purchase products only for personal use. This program is our "Preferred
Customer"
program. Preferred Customers may not resell or distribute
our products. We believe this program gives us access to a market that would otherwise be missed, by targeting customers who enjoy USANA products, but who prefer not to maintain a distribution
relationship with us. Although our policies prohibit Preferred Customers from engaging in retail sales of products, they may enroll as Associates at any time, if they desire. Preferred Customers are
not eligible to earn commissions or to participate in our Compensation Plan. As noted above, our China operations utilize a China Preferred Customer program, which is based on USANA's Preferred
Customer program in our other markets with modifications that we have made specifically for our China market.
Associate Training and Motivation
Initial training of Associates about the products, the Compensation Plan, network marketing, and USANA is provided primarily by an Associate's
sponsor and others in their sales organization. We develop and sell training materials and sales tools to assist Associates in building their businesses, as well as provide reprints from other
commercial publications that feature USANA and may be used as sales tools. We also sponsor and conduct regional, national, and international Associate events, as well as intensive leadership training
seminars. Attendance at these sessions is voluntary, and we undertake no generalized effort to provide individualized training to Associates, although experience shows that the most effective and
successful Associates participate in training activities. Although we provide leadership training and sales tools, we ultimately rely on our Associates to sell our products, attract new Associates and
Preferred Customers to purchase our products, and to educate and train new Associates regarding our products and Compensation Plan.
Associate Compensation
As outlined below, our Compensation Plan provides several opportunities for Associates to earn compensation, provided they are willing to
consistently work at building, training, and retaining their sales organizations to sell USANA products to consumers. The purpose behind each form of compensation under our Compensation Plan is to
reward Associates for generating product sales either directly or indirectly through their sales organization and network of product consumers.
Associates
can earn compensation in four ways:
-
-
Commissions.
The primary way an Associate is compensated is through earning
commissions. Associates earn commissions through generating sales volume points, which are a measure of the product sales of their sales organization. Each of our products has an assigned sales volume
point value comprised of a certain percent of the product price in U.S. dollars. To be eligible to earn commissions, an Associate must sell a certain amount of product each month ("Qualifying Sales").
Qualifying Sales may include products that the Associates either use personally or that they resell to consumers. Associates do not earn commissions on these Qualifying Sales. Associates may earn
commissions on their sale of products above the Qualifying Sales as well as the sale of products by Associates in their organization and to Preferred Customers. Additionally, Associates do not earn
commissions for simply recruiting and enrolling others in their organization. Commissions are paid only on the sale of products. We pay Associate commissions on a weekly basis. As noted elsewhere in
this report, our China operations maintain their own compensation plan, which has been implemented by BabyCare specifically for China.
-
-
Bonuses.
We offer Associates several bonus opportunities, including our
leadership bonus, elite bonus, and lifetime matching bonus. These bonus opportunities are based on a
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We
endeavor to integrate our Compensation Plan seamlessly across all markets where legally permissible, allowing Associates to receive commissions for globalnot merely
localproduct sales. This seamless sales organization structure is designed to allow Associates to build a global network by establishing or expanding their sales organization in any of
the markets where we operate. We believe our Compensation Plan significantly enhances our ability to expand internationally, and we intend to continue to integrate new markets, where permitted, into
our Compensation Plan.
Operating Strengths
Our principal objective is to improve the overall health and nutrition of individuals and families around the world. We do this through
(i) developing and manufacturing high-quality, science-based nutritional and personal care products that promote long-term health, (ii) personalizing our products to our customer's needs
and desires; and (iii) providing a rewarding opportunity through network marketing for our Associates who distribute our products. Our strategy is to capitalize on our operating strengths,
which include: a strong research and development program; in-house manufacturing capability; science-based products; an attractive Associate Compensation Plan; a scalable business model; and an
experienced management team.
Emphasis on Research and Development.
We have a technical team of experienced scientists, including several holding Ph.D. degrees,
quality engineers,
and regulatory specialists who contribute to our research and development activities. In our research and development laboratories, our scientists and
researchers:
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Investigate activities of natural extracts and formulated products in laboratory and clinical settings;
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Identify and research combinations of nutrients that may be candidates for new products;
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Develop new nutritional ingredients for use in supplements;
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Study the metabolic activities of existing and newly identified nutritional ingredients;
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Enhance existing USANA brand products, as new discoveries in nutrition and skin care are made;
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Formulate products to meet diverse regulatory requirements across all of our markets; and
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Investigate processes for improving the production of our formulated products.
Our
scientists and researchers also conduct double-blind, placebo-controlled, clinical studies, which are intended to further evaluate the efficacy of our products. In addition, we work
with outside research organizations to further support various aspects of our research and development efforts. Our in-house research team is working closely with scientists at a number of
universities and top research institutes, including those listed under the caption "Research and Development" above, to maintain our
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leadership
in clinical research in nutrition, oxidative stress, glycemic stress, chronic inflammation and health implications of the micro-biome. We have also funded clinical research programs at
Boston University, the University of Colorado, the University of Utah, the University of Sydney in Australia, TOSH, and Utah State University. Our R&D team also works closely with the Medical staff at
Sanoviv Medical Institute in Rosarito, Mexico to obtain additional perspectives on the use of supplements in a clinical setting and to get feedback on formulas in development. Additionally, our
Scientific Advisory
Council, comprised of health care professionals and nutritional science experts worldwide, provides us with valuable insights into product applications and efficacy. It is through our internal
research and development efforts, as well as our relationships with outside research organizations and health care providers, that we can provide what we believe to be some of the highest quality
health products in the industry.
In-house Manufacturing.
We manufacture products that account for approximately 67% of our product sales. We believe that our ability to
manufacture
our own products in-house is a significant competitive advantage for the following reasons:
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We can better control the quality of raw materials and finished products;
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We can more reliably monitor the manufacturing process to better guarantee potency and bioavailability and to reduce the risk of product
contamination;
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We can better control production schedules to increase the likelihood of maintaining an uninterrupted supply of products for our customers;
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We are able to produce most of our own prototypes in the research phase of product development; and
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We are better able to manage the underlying costs associated with manufacturing our products.
Science-based Products.
As a result of our emphasis on research and development and our in-house manufacturing capabilities, we have
developed a line
of high-quality health products that we believe provides health benefits to our customers. Our products have been developed based on a combination of published research, in-house laboratory and
third-party clinical studies, and sponsored research.
Attractive Associate Compensation Plan and Support.
We are committed to increasing our product sales by providing a highly competitive
compensation
plan to attract and retain Associates who constitute our sales force. We motivate our Associates by paying incentives on a weekly basis. Additionally, our Compensation Plan is, where permissible, a
global-seamless plan, meaning that Associates can be compensated each week for their business success in any market in which they have a sales organization where we conduct business. As noted
elsewhere in this report, our China operations maintain their own compensation plan, which is structured differently than USANA's plan in other markets.
To
support our Associates, we sponsor meetings and events throughout the year, which offer information about our products and our network marketing system. These meetings are designed to
assist Associates in business development and to provide a forum for interaction with some of our Associate leaders and with members of the USANA management team. We also provide low-cost sales tools
and resources, which we believe are an integral part of building and maintaining a successful home-based business for our Associates. For example, we offer a computer-based, interactive presentation
tool, called Health and Freedom Solution, which is designed to help our Associates easily explain and share the USANA opportunity, including the benefits of our products and our Compensation Plan.
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In
addition to company-sponsored meetings, sales tools and resources, we maintain a website exclusively for our Associates, where they can access the latest USANA news, obtain training
materials, manage their personal information, enroll new customers, shop for products, and register for company-sponsored events. Additionally, through this website, Associates can access other online
services to which they may subscribe. For example, we offer an online business management service, which includes a tool that helps Associates track and manage their business activity, a personal
webpage to which prospects or retail customers can be directed, and e-cards for advertising.
We
also believe that recognition is an important factor in supporting and retaining our Associates. We understand that being a successful USANA Associate requires hard work and
dedication, and we
celebrate key achievements and rank advancements of our Associates. We believe that our recognition programs greatly contribute to our ability to retain our Associates.
Business Model.
We believe that our business model provides, among others, the following advantages:
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No requirement for a company-employed sales force to sell our products, with a relatively low incremental cost to add a new Associate;
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Commissions paid to our Associates are tied to sales performance;
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Accounts receivable are minimal because payment is required at the time an Associate or Preferred Customer purchases product;
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A stream of recurring revenue from our monthly product subscription program known as "Auto Order," which we utilize in all of our markets (for
the year ended December 31, 2016, this program represented 51% of our product sales volume); and
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We can typically expand into new international markets with moderate investment because we generally maintain only warehouse facilities,
customer support, and minimal administrative facilities in those international markets. Larger markets, including China however, require more significant local investment.
Experienced Management Team.
Our management team includes individuals with expertise in various scientific and managerial disciplines,
including
nutrition, product research and development, international development, marketing, customer network development, information technology, manufacturing, finance, legal, regulatory, and operations. This
team is responsible for supporting growth, research and development, international expansion, strengthening our financial condition, and improving our internal controls.
Growth Strategy
We seek to grow our business by pursuing the following strategies:
Attract and Retain Customers.
Our customers, and Associates in particular, are central to the growth and success of our business.
Accordingly, our
primary growth strategy focuses on increasing our overall customer counts throughout the world. We will execute this strategy by applying both world-wide and region-specific initiatives, which include
the initiatives set out below. Our management team maintains a close working relationship with our Associate leaders by interacting with them on a regular basis through in-person meetings and phone
calls. Further, in addition to our Annual International Convention and our Asia Pacific Convention, we hold several regional events in key growth areas to provide support and training to Associates.
We continue to invest in these events and in the marketing of our business to help Associates improve the productivity of their businesses. We are also executing our Preferred Customer growth
initiatives described under the "Current Focus and Recent Developments" section above.
Personalization.
Our personalization initiative has been a key marketing and operating strategy for us over the last few years and will
continue to
be a key strategy going forward. This initiative focuses on personalizing and improving our overall business, as well as our customers' experience with USANA. We have already applied personalization
to many aspects of our business and have several additional enhancements planned going forward, all of which is further discussed under "Current Focus and Recent Developments" above.
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New Product Introductions.
Our research and development team continually reviews the latest scientific findings related to nutrition,
conducts or
manages research and clinical trials, reviews new technologies, and attends scientific conferences. If, in the process, we see potential for a new product or ingredient that provides a measurable and
important health benefit, and if we believe this benefit can be realized by a significant number of our customers, we will generally pursue development of that product. Our research and development
focus has and will continue to be centered on personalization and innovation. To the extent reasonably possible, we intend to personalize our product offering and product delivery systems to our
customers' individual needs. At our 2016 International Convention, we introduced one of the greatest product innovations in our history with the launch of our Incelligence product
platform. Incelligence is our proprietary, patent-pending, technology that is designed to support the body's natural ability to nourish, protect and renew itself. As part of our
Incelligence platform, we also launched our new flagship multivitamin, CellSentials. Incelligence is a key part of our growth strategy and has already been
launched in nine markets around the world with an additional six market launches planned going forward and will eventually be offered in China upon regulatory approval.
Successfully Grow each of our Regions through Market Specific Strategies and Incentives.
In light of the strength of our Asia Pacific
region and our
growing Associate base in Asia, we believe that Greater China continues to be the most significant and imminent growth opportunity for us. Our strategy in this region is focused on generating customer
growth in each market, with an emphasis on China. Our wholly-owned subsidiary, BabyCare, is our operating entity in China. BabyCare has been granted licenses to engage in direct selling in the
following twelve municipalities/provinces: Beijing, Jiangsu, Shaanxi, Tianjin, Liaoning Province, Shandong Province, Shanxi Province, Sichuan Province, Guangdong Province, Dalian City, Qingdao City,
and Shenzhen City. The eight licenses granted to BabyCare in 2016 require BabyCare to complete certain conditions and reporting requirements, which BabyCare is in the process of completing. BabyCare
is also working to obtain similar licenses in other provinces. In 2016, we successfully completed and transitioned our manufacturing operations to our new manufacturing facility in Beijing. We have
also spent the last few years registering USANA products for sale by BabyCare in China, educating our customers on our product offering and business model in China, and improving our information
systems, technology and infrastructure in China. We will continue to execute these strategies going forward.
We
are also confident in our growth potential in our Southeast Asia Pacific region. While the Philippines, Australia and New Zealand have been key growth markets for us in this region,
we generated constant currency sales and customer growth in nearly every market in this region in 2016. We have implemented strategies for each market in this region, which are intended to continue
our customer growth trend in 2017. 2016 was the first full operational year for USANA in Indonesia, our newest market in this region. Indonesia is USANA's 20
th
market and we
believe it offers a promising growth opportunity for us.
Our
Americas and Europe region is also very important to our business and a significant part of our growth strategy. We achieved double-digit constant currency sales growth in Mexico and
Canada in 2016, and expect growth in these markets to continue in 2017. Although our sales and customer counts have declined in the United States over the last several years, we remain focused on
growth in this market. Our objective for this region remains centered on increasing the overall number of customers who consistently use USANA products. To achieve our objective, we will continue to
execute our personalization and brand-awareness strategies and also utilize market-specific promotions and incentives.
Brand Awareness:
To facilitate customer growth, we plan to continue to promote global awareness of the USANA brand through various
strategies,
including professional athlete sponsorships and credible associations with individuals and organizations. Examples of this include our sponsorship of the U.S. Ski Team and our partnership with the
Women's Tennis Association. We continue to serve as the
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official
health supplement supplier for these teams and organizations and are also increasing our sponsorship of individual athletes who rely on our products and brand. We seek to leverage these
relationships to build brand credibility and increase product consumption and loyalty. In addition to our athlete sponsorships, we seek to advertise and collaborate with credible, nationally
recognized organizations and individuals to enhance our global brand. We will also continue our relationship with Dr. Mehmet Oz as a Trusted Partner and Sponsor of
The
Dr. Oz Show
, as discussed further under "Current Focus and Recent Developments" above. While branding efforts such as this have a global reach, the primary objective of
this initiative is to grow sales and customers in the Americas and Europe.
Enter New Markets.
We believe that significant growth opportunities continue to exist in markets where we currently conduct business
and in new
international markets. We commenced operations in Indonesia during the fourth quarter of 2015. This market, as well as future markets, are selected following an assessment of several factors,
including market size, anticipated demand for USANA products, receptiveness to network marketing, and the market entry process, which includes consideration of possible regulatory restrictions on our
products or our network marketing system. We have also begun to register certain products with regulatory and government agencies in other countries in preparation for further international expansion.
Wherever possible, we expect to seamlessly integrate the Compensation Plan in each market to allow Associates to receive commissions for globalnot merely localproduct sales.
This seamless sales structure is designed to allow an Associate to build a global network by creating a sales organization across national borders. We believe our seamless Compensation Plan
significantly enhances our ability to expand internationally, and we intend, where permitted, to integrate future markets into this Compensation Plan. While we deem new market expansion as a key
growth strategy, given the significant opportunity that currently exists in China, we plan to focus the majority of our time and resources on growing that market.
Pursue Strategic Acquisitions.
We believe that attractive acquisition opportunities may arise in the future. We intend to pursue
strategic
acquisition opportunities that would grow our customer base, expand our product lines, enhance our manufacturing and technical expertise, allow vertical integration, or otherwise complement our
business or further our strategic goals.
Competition
We compete with manufacturers, distributors, and retailers of nutritional products for consumers, and we compete with network marketing
companies for distributors. On both fronts, some of our competitors are significantly larger than we are, have a longer operating history, higher visibility and name recognition, and have greater
financial resources than we do. We compete with these entities by emphasizing the underlying science, value, and superior quality of our products, the simplicity in our product offerings, and the
convenience and financial benefits afforded by our network marketing system and global seamless Compensation Plan.
Our
business is driven primarily by our distributors, whom we refer to as Associates. Our ability to compete with other network marketing companies depends, in significant part, on our
success in attracting and retaining Associates. There can be no assurance that our programs for attracting and retaining Associates will be successful. The pool of individuals interested in network
marketing is limited in each market and is reduced to the extent other network marketing companies successfully attract these individuals into their businesses. Although we believe that we offer an
attractive opportunity for our Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential
Associates in a given market.
We
believe that the leading network marketing company in the world, based on total sales, is Amway Corporation and its affiliates, and that Avon Products, Inc. is the leading
direct seller of beauty
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and
related products worldwide. Leading competitors in the nutritional network marketing and nutritional product industry include Herbalife Ltd., Inc.; Nu Skin Enterprises, Inc.;
and NBTY, Inc. Based on information that is publicly available, 2016 net sales of the aforementioned companies ranged from $2.2 billion to $5.6 billion. There are other
manufacturers of competing product lines that have or may launch direct selling enterprises that compete with us in certain product lines and in the recruiting of Associates. There can be no assurance
that we will be able to successfully meet the challenges posed by increased competition.
Product Returns
Product returns have not been a material factor in our business, totaling approximately 0.8%, 0.6%, and 0.7% in 2014, 2015, and 2016,
respectively. Customer satisfaction has always been and will continue to be a hallmark of our business. We believe that we have always offered a generous product return policy. Our standard return
policy allows Associates and Preferred Customers to receive a 100% refund on the sales price of any unused and resalable products that are returned up to one year from the date of purchase. This
standard policy differs slightly in a few of our international markets due to the regulatory environment in those markets. To avoid manipulation of our Compensation Plan, return of product where the
purchase amount exceeds $100 and was not damaged at the time of receipt by the Associate may result in cancellation of an Associate's distributorship.
Major Customers
Sales are made to independent Associates and Preferred Customers. No single customer accounted for 10% or more of net sales. Notwithstanding the
foregoing, the nature of our business model results in a significant amount of sales to several different Associate leaders and their sales organizations. Although no single Associate accounted for
10% or more of our net sales, the loss of a key Associate leader or that Associate's sales organization could adversely affect our net sales and our overall operating results.
Compliance by Associates
We continually monitor and review our Associates' compliance with our policies and procedures as well as the laws and regulations applicable to
our business around the world. Part of this review entails an assessment of our Associates' sales activities to ensure that Associates are actually selling products to consumers. Our policies and
procedures require Associates to present our products and the USANA opportunity ethically and honestly. Associates are not permitted to make claims about our products or Compensation Plan that are not
consistent with our policies and procedures and applicable laws and regulations. The majority of our Associates must use marketing and promotional materials provided by USANA. Associates who have
achieved a certain leadership level are permitted, however, to produce their own marketing and promotional materials, but only if such materials are approved by USANA prior to use.
From
time to time, we have Associates who fail to adhere to our policies and procedures. We systematically review reports of alleged Associate misbehavior. Infractions of the policies
and procedures are reported to our compliance group, who determine what disciplinary action is warranted in each case. More serious infractions are reported to our Compliance Committee, which includes
USANA executives. If we determine that an Associate has violated any of our policies and procedures, we may take a number of disciplinary actions, such as warnings, fines or probation. We may also
withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied, or take other appropriate actions in our discretion, including termination of the Associate's
purchase and distribution rights.
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We
believe that Associate compliance is critical to the integrity of our business and, therefore, we are aggressive in ensuring that our Associates comply with our policies and
procedures. As explained above, when an Associate fails to comply with our policies and procedures, we may terminate their purchase and distribution rights. From time to time, we become involved in
litigation with Associates whose purchase and distribution rights have been terminated. We consider such litigation to be routine and incidental to our business and will continue to be aggressive in
ensuring that our Associates comply with our policies and procedures.
Information Technology
We believe that the ability to efficiently manage distribution, compensation, manufacturing, inventory, and communication functions through the
use of secure, sophisticated, and dependable information processing systems is critical to our success. We continually evaluate changes in the information technology environment to ensure that we are
capitalizing on new technologies, keeping pace with regulatory standards, and ensuring that our systems and data are secure. Over the next few years we intend to increase our investment in technology
systems and infrastructure as we prepare to become a much larger company.
Our
information technology resources are maintained primarily by our in-house staff to optimally support our customer base and core business processes. Our IT staff manages an array of
systems and processes which support our global operations 24 hours a day and 365 days a year. Three of our most critical applications include:
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A web-based application that provides online services to Associates, such as training sessions and presentations, online shopping, enrollment,
a real-time reporting engine, Company and product information, web-hosting, email, and other tools to help Associates effectively manage their business and sales organizations.
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A web-based order-entry system that handles order entry, customer information, compensation, Associate business structure, returns, invoices,
and other transactional-based processes.
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A fully integrated world-wide Enterprise Resource Planning ("ERP") system that handles accounting, human resources, inventory management,
production processes, quality assurance, and reporting requirements in a multinational environment.
Our
web applications are supported by a clustered environment providing high availability. All production systems are fully backed-up and stored off-site to mitigate the risk of
significant interruption of our business in the event of a disaster at the locations of our primary servers.
Regulatory Matters
General.
In the United States and the other countries where we operate, our business is subject to extensive governmental laws and
regulations. These
laws and regulations exist at various levels in the United States and other countries and pertain to our products, network marketing program, and other aspects of our business as described in more
detail below.
Product Regulation.
Numerous governmental agencies in the United States and other countries regulate
the manufacturing, packaging, labeling, advertising, promoting, importing, distributing, and the selling of nutrition, health, beauty, and weight-management products. In the United States,
advertisement of our products is regulated by the Federal Trade Commission ("FTC") under the FTC Act and, where such advertising is considered to be product labeling by the FDA, under the Food, Drug,
and Cosmetic Act ("FDCA") and the regulations thereunder. USANA products in the United States are also subject to regulation by, among others, the Consumer Product Safety Commission, the U.S.
Department of Agriculture, and the Environmental Protection Agency.
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Our
largest selling product group includes products that are regulated as dietary supplements under the FDCA. Dietary supplements are also regulated in the United States under the
Dietary Supplement Health and Education Act of 1994 ("DSHEA"), which we believe is generally favorable to the dietary supplement industry. Some of our powdered drink, food bar, and other nutrition
products are regulated as foods under the Nutrition Labeling and Education Act of 1990 ("NLEA"). The NLEA establishes requirements for ingredient and nutritional labeling including product labeling
claims. The manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs and
Pharmaceutical GMP's, with additional requirements that are specific to dietary supplements. We are audited annually by the US FDA, specifically for dietary supplements and have been found in full
compliance with GMPs for dietary supplements. The Dietary Supplement & Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products to
notify the FDA when they receive reports of serious adverse events occurring within the United States. We have an internal adverse event reporting system that has been in place for several years, and
we believe that we are in compliance with this law.
In
general, our personal care products, which are regulated as cosmetic products by the FDA, are not subject to pre-market approval by that agency. Cosmetics, however, are subject to
regulation by the FDA under the FDCA adulteration and misbranding provisions. Cosmetics also are subject to specific labeling regulations, including warning statements, if the safety of a cosmetic is
not adequately substantiated or if the product may be hazardous, as well as ingredient statements and other packaging requirements under the Fair Packaging and Labeling Act. Cosmetics that meet the
definition of a drug, such as sunscreens, are regulated as drugs. Over-the-counter ("OTC") drug products, including cosmetics, may be marketed if they conform to the requirements of the OTC monograph
that is applicable to that drug. Drug products not conforming to monograph requirements require an approved New Drug Application ("NDA") before marketing may begin. Under these provisions, if the
agency were to find that a product or ingredient of one of our OTC drug products is not generally recognized as safe and effective or is not included in a final monograph that is applicable to one of
our OTC drug products, we would be required to reformulate or cease marketing that product until it is the subject of an approved NDA or until the time, if ever, that the monograph is amended to
include such product.
Advertising
of our products in the United States is subject to regulation by the FTC under the FTC Act. Under the FTC's Substantiation Doctrine, an advertiser is required to have a
"reasonable basis" for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. Pursuant to this FTC
requirement, we are required to have adequate substantiation for all material advertising claims that we make for our products in the United States. In recent years, the FTC has initiated numerous
investigations of and actions against companies that sell dietary supplement, weight-management, and cosmetic products. The FTC has issued guidance to assist companies in understanding and complying
with its substantiation requirement. We believe that we have adequate substantiation for all material advertising claims that we make for our products in the United States, and we believe that we have
organized the documentation to support our advertising and promotional practices in compliance with these guidelines. However, no assurance can be given that the FTC would reach the same conclusion if
it were to review or question our substantiation for our advertising claims in the United States.
The
FTC may enforce compliance with the law in a variety of ways, both administratively and judicially, using compulsory process, cease and desist orders, and injunctions. FTC
enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief
as the agency deems necessary to protect the public. Violation of these orders could result in substantial financial or other penalties. Although, to our knowledge, we have not been the subject of any
action by the FTC, no
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assurance
can be given that the FTC will not question our advertising or other operations in the United States in the future. Any action in the future by the FTC could materially and adversely affect
our ability to successfully market our products in the United States.
The
manufacturing, labeling, and advertising of our products are also regulated by various governmental agencies outside the United States in each country where they are distributed. For
example, in Australia, product registration, labeling and manufacturing is regulated by the TGA and, in Japan, the Ministry of Health, Labor and Welfare. In China, the China Food and Drug
Administration ("CFDA") regulates product registration, labeling and manufacturing. In markets outside the United States, prior to commencing operations or marketing products, we may be required to
obtain approvals, licenses, or certifications from a country's Food Administration, Ministry of Health or comparable agency. Approvals or licensing may be conditioned on reformulation of USANA
products for the market or may be unavailable with respect to certain products or product ingredients. We must also comply with local product labeling and packaging regulations that vary from country
to country. For example, China extensively regulates the registration, labeling and marketing of our products. In China, our nutritional products are typically classified as "health functional foods"
and our personal care products are typically classified as "non-special use cosmetics". The registration process for health functional foods is complex and generally requires extensive analysis and
approval by the CFDA. As a result, it may take several years to register a product as a health functional food in China. While all products currently sold by BabyCare in China have been registered
with the CFDA, we continue to
work through the registration process for other health functional food products, which we also hope to begin selling through BabyCare in the future.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business. Future changes could include requirements for the reformulation of certain products to meet new standards, the recall or discontinuation of
certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, and additional scientific
substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, and operating results.
Network Marketing Regulation.
Various laws and regulations in the United States and other countries regulate network marketing, or
direct selling.
These laws and regulations exist at many levels of government in many different forms, including statutes, rules, regulations, judicial decisions, and administrative orders. Generally, the regulations
are directed at: (i) ensuring that product sales ultimately are made to consumers and that advancement within a sales organization is based on product sales rather than on investments in the
organization or on other criteria that are not related to sales; and (ii) preventing the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with
legitimate direct selling and network marketing activities. Network marketing regulations are inherently fact-based and often do not include "bright line" rules. Additionally, we are subject to the
risk that the regulations, or a regulator's interpretation and enforcement of the regulations, could change.
Network
marketing companies, and the industry in general, continue to experience significant media and public scrutiny in many countries. Several companies similar to ours have been
scrutinized and penalized in several markets where we operate, including the United States, Canada, China, Japan, and South Korea. This scrutiny, along with the uncertainty of the laws and regulations
pertaining to network marketing in many countries, can affect how a regulator or member of the public perceives our Company. For instance, there has been significant media and short-seller attention
regarding the viability and legality of network marketing in the United States and China over the past few years. This attention has led to intense public scrutiny of the industry, as well as
volatility in our stock price and
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the
stock prices of companies similar to our company. We cannot predict the impact that this scrutiny may have on our business or the industry in general.
The
Chinese government has adopted direct selling laws and regulations that are uncertain and evolving. These regulations contain a number of financial and operational restrictions for
direct selling companies, most notably on pyramid selling and multi-level compensation. These regulations are also subject to discretionary interpretation and enforcement by various municipal and
provincial level officials in China. For a description of the various risks associated with our business see the "Risk Factors" section of this report.
Transfer Pricing Regulation.
In the United States and many other countries, we are subject to transfer pricing and other tax
regulations that are
designed to ensure that appropriate levels of income are reported by our U.S. or international entities and are taxed accordingly. We have adopted transfer prices, which are supported by formal
transfer pricing studies for the sale of products to our subsidiaries in accordance with applicable transfer pricing laws. In addition, we have entered into agreements with our subsidiaries for
services and other contractual obligations, such as the payment of Associate incentives that are also supported by the same formal transfer pricing studies. If the U.S. Internal Revenue Service or the
taxing authorities of any other jurisdiction were to successfully challenge these agreements or require changes in our standard transfer pricing practices for products, we could become subject to
higher taxes and our earnings could be adversely affected. The tax treaties between the United States and most countries provide competent authority for relief to avoid any double taxation. We believe
that we operate in compliance with all applicable transfer pricing regulations. There can be no assurance, however, that we will continue to be found to be operating in compliance with transfer
pricing regulations or that those laws will not be modified, which may require that we change our operating procedures.
Intellectual Property
Trademarks.
We have developed and use registered trademarks in our business, particularly relating to our corporate and product names.
We own 25
trademarks that are registered with the U.S. Patent and Trademark Office. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered
mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the
area where the unauthorized use occurs. We have filed applications and own trademark registrations, and we intend to register additional trademarks in countries outside the United States where USANA
products are or may be sold in the future. Protection of registered trademarks in some jurisdictions may not be as extensive as the protection in the United States.
We
also claim ownership and protection of certain product names, unregistered trademarks, and service marks under common law. Common law trademark rights do not provide the same level of
protection that is afforded by the registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these
trademarks, whether registered or claimed under common law, constitute valuable assets, adding to recognition of USANA and the effective marketing of USANA products. Trademark registration once
obtained is essentially perpetual, subject to the payment of a renewal fee. We therefore believe that these proprietary rights have been and will continue to be important in enabling us to compete.
Trade Secrets.
We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality
agreements
with employees and other parties. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that
our trade secrets will not otherwise become known to
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or
independently developed by competitors. Our proprietary product formulations are generally considered trade secrets, but are not otherwise protected under intellectual property laws.
Patents.
We have three U.S. patents. Two of our patents relate to the method of extracting an antioxidant from olives and the
byproducts of olive oil
production. These patents were issued in 2002 and will continue in force until December 20, 2019. Our third patent relates to a method of self-preserving our Sensé
line of personal care products. This patent was issued in May 2007 and will continue in force until August 5, 2024.
We
intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine
the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.
Seasonality
Although we are not significantly affected by seasonality, we do experience variations in the activity of our Associates in many of our markets
in the first and fourth quarters around major cultural events such as Chinese New Year and Christmas.
Backlog
Our products are typically shipped within 72 hours after receipt of an order. As of February 24, 2017 we had no significant
backlog of orders.
Working Capital Practices
We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our Associates and Preferred Customers.
Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor. We also watch seasonal commodity markets and may buy ahead of normal demand to hedge against
cost increases and supply risks.
Environment
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in
which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
Employees
As of February 24, 2017 we had approximately 1,788 employees worldwide, as measured by full-time equivalency. Our employees are not
currently represented by a collective bargaining agreement, and we have not experienced work stoppages as a result of labor disputes. We believe that we have a good relationship with our employees.
Additional Available Information
We maintain executive offices and principal facilities at 3838 West Parkway Boulevard, Salt Lake City, Utah 84120. Our telephone number is
(801) 954-7100. We maintain a World Wide Web site at www.usanahealthsciences.com. The information on our web site should not be considered part of this report on Form 10-K.
We
make available, free of charge at our corporate web site, copies of our annual reports on United States Securities and Exchange Commission ("SEC") Form 10-K, quarterly reports
on SEC Form 10-Q, current reports on SEC Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed
with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This information may also be obtained from the SEC's on-line database, which is located at
www.sec.gov.
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Item 1A. Risk Factors
Forward-Looking Statements and Certain Risks
We encounter substantial risks in our business, any one of which may adversely affect our business, results of
operations or financial condition. The fact that some of these risk factors may be the same or similar to those that we have filed with the Securities and Exchange Commission in past reports means
only that the risks are present in multiple periods. We believe that many of the risks that are described here are part of doing business in the industry in which we operate and will likely be present
in all periods. The fact that certain risks are endemic to the industry does not lessen their significance. These risk factors should be read together with the other items in this report, including
Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Among others, risks and uncertainties that may affect our
business, financial condition, performance, development, and results of operations include the following:
We are a network marketing company and are dependent upon an independent sales force of "Associates" to sell our products. If we are unable to attract and retain Associates, our
business
may be harmed.
We rely on non-employee, independent Associates to market and sell our products and to generate our sales. Our ability to maintain and increase
sales in the future will depend in large part upon our success in increasing the number of new Associates, retaining and motivating our existing Associates, and in improving the productivity of our
Associates. Associates typically market and sell our products on a part-time basis and likely will engage in other business activities, some of which may compete with us. We rely primarily upon our
Associates to attract, train and motivate new Associates. Our ability to continue to attract and retain Associates can be affected by a number of factors, some of which are beyond our control,
including:
-
-
General business and economic conditions;
-
-
Adverse publicity or negative misinformation about our industry, us or our products;
-
-
Negative public perceptions about network marketing programs;
-
-
High-visibility investigations or legal proceedings against network marketing companies by federal or state authorities or private citizens;
-
-
Public perceptions about the value and efficacy of nutritional or dietary supplement, products generally;
-
-
Other competing network marketing organizations entering into the marketplace that may recruit our existing Associates or reduce the potential
pool of new Associates; and
-
-
Changes to the Compensation Plan required by law or implemented for business reasons that make attracting and retaining Associates more
difficult.
We
can provide no assurance that the number of Associates will increase or remain constant or that their productivity will increase. Our Associates may terminate their services at any
time, and, like most direct selling companies, we experience a high turnover among new Associates from year to year. While our total number of active Associates has continued to increase during recent
years, a few of our markets, including the United States, have experienced a decline in the number of active Associates. If our strategies and initiatives do not drive growth in our Associate numbers,
particularly in the United States, China and other markets, our operating results could be harmed. We cannot accurately predict any fluctuation in the number and productivity of Associates because we
primarily rely upon existing Associates to train new Associates and to motivate new and existing Associates. Our operating results in other markets could also be adversely affected if we do not
generate sufficient interest in our business to successfully retain existing Associates and attract new Associates.
The loss of a significant USANA Associate or Associate sales organization could adversely affect our business.
We rely on the
successful efforts of
our Associates that become leaders within our
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Compensation
Plan. Our Compensation Plan is designed to permit Associates to sponsor new Associates, thereby creating sales organizations. As a result, Associates develop business and personal
relationships with other Associates. The loss of a key Associate or group of Associates, large turnover or decreases in the size of the key Associate force, seasonal or other decreases in product
purchases, sales volume reduction, the costs associated with training new Associates, and other related expenses may adversely affect our business, financial condition, or results of operations.
The violation of marketing or advertising laws by Associates in connection with the sale of our products or the improper promotion of our Compensation Plan could adversely affect
our
business.
All Associates sign a written contract and agree to adhere to our policies and procedures. Although these policies and procedures prohibit Associates
from making false, misleading and other improper claims regarding products or income potential from the distribution of the products, 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. They also may make statements regarding potential
earnings, product claims, or other matters in violation of our policies or applicable laws and regulations concerning these matters. These violations may result in legal action against us by
regulatory agencies, state attorneys general, or private parties. Legal actions against our Associates or others who are associated with us could lead to increased regulatory scrutiny of our business,
including our network marketing system. We take what we believe to be commercially reasonable steps to monitor the activities of our Associates to guard against misrepresentation and other illegal or
unethical conduct by Associates and to assure that the terms of our policies and procedures and Compensation Plan are observed. There can be no assurance, however, that our efforts in this regard will
be sufficient to accomplish this objective, particularly in times/regions where we may experience rapid growth. Adverse publicity resulting from such activities could also make it more difficult for
us to attract and retain Associates and may have an adverse effect on our business, financial condition, and results of operations.
We may have or could incur obligations relating to the activities of our Associates.
Our Associates are subject to taxation, and,
in some instances,
legislation or governmental agencies impose an obligation on us to collect taxes, such as sales taxes or value added taxes, and to maintain appropriate records of such transactions. In addition, we
are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our Associates. In the event that local laws and regulations or the
interpretation of local laws and regulations change to require us to treat our independent Associates as employees, or if our Associates are deemed by local regulatory authorities in one or more of
the jurisdictions in which we operate to be our employees rather than independent contractors, under existing laws and interpretations, we may be held responsible for a variety of obligations that are
imposed upon employers relating to their employees, including social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial
condition and operating results.
Network marketing is subject to intense government scrutiny, and regulation and changes in the law, or the interpretation and enforcement of the law, might adversely affect our
business.
Various laws and regulations in the United States and other countries regulate network marketing, or direct selling. These laws and regulations exist at
many levels of government in many different forms, including statutes, rules, regulations, judicial decisions, and administrative orders. Network marketing regulations are inherently fact-based and
often do not include "bright line" rules. Additionally, we are subject to the risk that the regulations, or a regulator's interpretation and enforcement of the regulations, could change. From time to
time, we have received requests to supply information regarding our network marketing plan to regulatory agencies. We have also modified our network marketing plan in the past to comply with the
interpretation of the regulations by authorities. Where required by law, we obtain regulatory approval of our network marketing plan, or, where approval is not required or available, the favorable
opinion of local counsel as to regulatory compliance. Further, we may simply be prohibited
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from
distributing products through a network-marketing channel in some countries, or we may be forced to alter our Compensation Plan.
We
are subject to the risk that, in one or more countries, our network marketing plan, or the conduct of certain of our Associates, could be found not to be in compliance with applicable
laws and regulations. For instance, the FTC has recently issued guidance to U.S. direct selling companies in several different ways. 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. In this regard, the FTC has challenged the distributor compensation plans used by certain direct sellers over the
last several years. In each instance, the FTC obtained a consent decree requiring those companies to (i) discontinue using all, or certain parts of, their distributor compensation plan, and
(ii) implement a compensation plan that had been approved by the FTC. While we strive to ensure that our overall business, and Associate Compensation Plan, is regulatory compliant, we cannot be
certain that the FTC, or a regulator in another country, will not continue to modify guidance, laws or regulations or interpret the same in a way that would render our current practices inconsistent
with the same.
Additionally,
we cannot predict the nature of any future law, regulation, or guidance, nor can we 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 network marketing companies could harm our
business and industry if the laws and regulations are interpreted in a way that results in additional restrictions on network marketing companies in general.
Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products in some
markets.
The manufacture, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national and
local governmental agencies in the United States and other countries, including the FDA and the FTC. For example, failure to comply with FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by the FDA could materially adversely affect our ability to successfully market
our products.
The
manufacture of nutritional or dietary supplements and related products in the United States requires compliance with dietary supplement GMPs, which are based on the food-model GMPs,
with additional requirements that are specific to dietary supplements. We believe our manufacturing processes comply with these GMPs for dietary supplements. Nevertheless, any FDA action determining
that our processes were non-compliant with dietary supplement GMPs, could materially adversely affect our ability to manufacture and market our products. Additionally, the Dietary Supplement &
Nonprescription Drug Consumer Protection Act requires manufacturers of dietary supplement and over-the-counter products to notify the FDA when they receive reports of serious adverse events occurring
within the United States. Potential FDA responses to any such report could include injunctions, product withdrawals, recalls, product seizures, fines, or criminal prosecutions. We have an internal
adverse event reporting system that has been in place for several years and believe that we are in compliance with this new law. Nevertheless, any action by the FDA in response to a serious adverse
event report that may be filed by us could materially and adversely affect our ability to successfully market our products.
In
markets outside the United States, prior to commencing operations or marketing our products, we may be required to obtain approvals, licenses, or certifications from a country's
ministry of health or a comparable agency. For example, our manufacturing facility has been registered with the FDA and
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Health
Canada and is certified by Australia's TGA. Approvals or licensing may be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients.
China also extensively regulates the registration, labeling and marketing of our products. Consequently, the registration process for our products in China is complex and generally requires extensive
analysis and approval by the CFDA. As a result, it may take several years to register a product in China. We must also comply with product labeling and packaging regulations that vary from country to
country. These activities are also subject to regulation by various agencies of the countries in which our products are sold.
We
cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative
orders, when and if promulgated, could have on our business. These potential effects could include, however, requirements for the reformulation of certain products to meet new standards, the recall or
discontinuance of certain products, additional record keeping and reporting requirements, expanded documentation of the properties of certain products, expanded or different labeling, or additional
scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition, or results of operations.
Our manufacturing activity is subject to certain risks.
We manufacture approximately 67% of the products sold to our customers.
As a result, we are
dependent upon the uninterrupted and efficient operation of our manufacturing facilities. Those operations are subject to power failures, the breakdown, failure, or substandard performance of
equipment, the improper installation or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of government agencies, including the FDA and
CFDA. There can be no assurance that the occurrence of these or any other operational problems at our facilities would not have a material adverse effect on our business, financial condition, or
results of operations. We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and
hazardous waste, and other toxic and hazardous materials. Our manufacturing operations presently do not result in the generation of material amounts of hazardous or toxic substances. Nevertheless,
complying with new or more stringent laws or regulations, or more vigorous enforcement of current or future policies of regulatory agencies, could require substantial expenditures by us that could
have a material adverse effect on our business, financial condition, or results of operations. Environmental laws and regulations require us to maintain and comply with a number of permits,
authorizations, and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of those requirements could result in financial
penalties and other enforcement actions and could require us to halt one or more portions of our operations until a violation is cured. The combined costs of curing incidents of non-compliance,
resolving enforcement actions that might be initiated by government authorities, or of satisfying new legal requirements could have a material adverse effect on our business, financial condition, or
results of operations.
We may incur liability with respect to our products.
As a manufacturer and a distributor of products for human consumption and
topical application,
we could become exposed to product liability claims and litigation. Additionally, the manufacture and sale of these products involves the risk of injury to consumers due to tampering by unauthorized
third parties or product contamination. To date, we have not been a party to any product liability litigation, although, like any dietary supplement company, we have received reports from individuals
who have asserted that they suffered adverse consequences as a result of using our products. The number of reports we have received to date is nominal. These matters historically have been settled to
our satisfaction and have not resulted in material payments. We are aware of no instance in which any of our products are or have been defective in any way that could give rise to material losses or
expenditures related to product liability claims. Although we maintain
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product
liability insurance, which we believe to be adequate for our needs, there can be no assurance that we will not be subject to such claims in the future or that our insurance coverage will be
adequate.
Our Greater China region accounts for a significant part of our business and expected growth. Any decline in sales or customers in this region would harm our business, financial
condition and results of operations.
Our Greater China region consists of China, Hong Kong and Taiwan and is currently our largest and most rapidly growing region.
Our international growth strategy has been centered on growing BabyCare's business in China for the last several years. As a result of this strategy, China has been our fastest growing market and is
now our largest individual market. If we are not successful in continuing to grow BabyCare's sales and customer base in China, our consolidated growth as a company will be negatively affected and our
business, financial condition and results of operations may be harmed. BabyCare must comply with significant operational, financial, and other regulatory requirements to engage in direct selling in
China. Although we believe that, in light of our successful Asian Associate base, we will be successful in growing BabyCare's business in China, it is difficult to assess the extent to which
BabyCare's Chinese business model and Associate compensation plan will be successful in that market or deemed to be compliant with applicable laws and regulations by the Chinese government. Although
we are required to conduct our operations in China through BabyCare, we believe that our long-term success in China will depend on our ability to successfully integrate, to the extent possible, our
operations with BabyCare's operations. In light of the factors listed above, and the other risks to our business, there can be no assurance that we will be successful in growing sales and customers in
China through BabyCare.
Our operations in China are subject to significant government regulation and scrutiny, as well as a variety of legal, political, and economic risks. If the government modifies the
direct
selling regulations, or interprets and enforces the regulations in a manner that is adverse to our business in China, our consolidated business and results of operations may be materially
harmed.
Our business in China is that of BabyCare, a direct selling company that we indirectly acquired several years ago to facilitate our expansion into China.
BabyCare has been granted licenses from the Chinese government to conduct direct selling operations in twelve provinces in China and has applied for licenses in additional municipalities and
provinces. BabyCare's business model has been designed specifically for China based on a number of factors, including: (i) BabyCare's communications with the Chinese government,
(ii) BabyCare's interpretation of the direct selling regulations, as well as their understanding of how the government interprets and enforces the regulations, and (iii) BabyCare's
understanding of how other multinational direct selling companies operate in China. Notwithstanding the foregoing, BabyCare has not received confirmation from the Chinese government that its business
model and operations in China comply with applicable laws and regulations, including those pertaining to direct selling.
The
direct selling laws and regulations in China are uncertain and evolving. These regulations contain a number of financial and operational restrictions for direct selling companies,
most notably on pyramid
selling and multi-level compensation. The laws and regulations are also subject to discretionary interpretation and enforcement by various state, provincial and municipal level officials in China. We
cannot be certain that BabyCare's business model or the activities of its employees or Associates will be deemed by Chinese regulatory authorities to be compliant with current or future laws and
regulations.
Chinese
regulators regularly monitor and make inquiries about the business activities of direct sellers in China and have done so with BabyCare. These inquiries can arise in a variety of
ways, including from complaints from customers, competitors or the media. These inquiries or complaints may result in the Chinese government investigating the particular complaint or BabyCare's
business in general. There have been instances where inquiries or complaints about BabyCare's business have resulted in warnings from the Chinese government and/or the payment of fines by BabyCare.
Going forward, BabyCare will continue to face the risk of government inquiries, complaints or investigations, and any determination that BabyCare's business, or the activities of its Associates, are
not in compliance with applicable regulations could result in additional fines, disruption of business, or the
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suspension
or termination of BabyCare's licenses, including its direct selling licenses, all of which could have an adverse effect on our business and operations. As such, there can be no assurance
that the Chinese government's interpretation and enforcement of applicable laws and regulations will not negatively impact BabyCare's business, result in regulatory investigations or lead to fines or
penalties against BabyCare, USANA or our Associates in China.
The
direct selling regulations in China prevent persons who are not Chinese nationals from engaging in direct selling in China. Although we have implemented internal policies that are
designed to promote our Associates' compliance with these regulations, we cannot guarantee that any of our Associates living outside of China or any of BabyCare's Associates in China have not engaged
or will not engage in activities that violate our policies in this market or that violate Chinese law or other applicable laws and regulations and, therefore, might result in regulatory action and
adverse publicity, which would harm our business in China.
BabyCare
is required to obtain various licenses and approvals from municipalities and provinces within China to operate its direct selling business model. Currently, BabyCare holds
twelve such licenses, the eight most recent of which are subject to BabyCare's satisfaction of certain conditions and reporting requirements. BabyCare will be required to obtain licenses from
municipalities and provinces within China where it does not hold a license. If BabyCare is unable to obtain additional direct selling licenses as quickly as we would like, it would have a negative
impact our ability to expand and grow our business. The process for obtaining the necessary government approvals to conduct direct selling continues to evolve, is time-consuming and expensive. The
complexity of the approval process, as well as the government's continued cautious approach for direct selling in China, makes it difficult to predict the timeline for obtaining additional approvals.
The Chinese government regularly investigates direct selling companies and may decide to increase its scrutiny of the industry or modify the applicable regulations
and process. If the current processes for obtaining approvals are delayed for any reason or are changed or are interpreted differently than currently understood, these events could have a negative
impact on BabyCare's growth prospects in China. Ultimately, there can be no assurance that BabyCare will be successful in maintaining its current direct-selling licenses or obtaining additional
direct-selling licenses or the required approvals to expand into additional locations in China that are important to its business.
If
BabyCare's operations in China are successful, we may experience rapid growth in China, and there can be no assurances that we will be able to successfully manage rapid expansion of
BabyCare's direct selling activities under license in China or the related manufacturing and retail operations required to support this expansion. If we are unable to effectively manage BabyCare's
growth and expansion, including expansion of branches, warehouses, and manufacturing operations, BabyCare's government relations may be compromised and our operations in China may be harmed.
Risks associated with operating in international markets could restrict our ability to expand globally and harm our business and prospects, and we could be adversely affected by
our
failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery
laws.
Our international operations are presently conducted in various foreign countries, and we expect that the number of countries in which we operate could
expand over the next few years. Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts or volatility in the global markets, may adversely affect
our customers, their demand for our products and their ability to pay for our products. In addition, there are numerous risks inherent in conducting our business internationally, including, but not
limited to, potential instability in international markets, changes in regulatory requirements applicable to international operations, currency fluctuations in foreign countries, political, economic
and social conditions in foreign countries and complex U.S. and foreign laws and treaties, including tax laws, the U.S. Foreign Corrupt Practices Act (FCPA), and the Bribery Act of 2010 (U.K.
Anti-Bribery Act). These risks could restrict 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.
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The
FCPA prohibits U.S.-based companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. We are also
subject to the U.K. Anti-Bribery Act, which prohibits both domestic and international bribery as well as bribery across both public and private sectors. We pursue opportunities in certain parts of the
world that experience government corruption and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs and practices. Our policies mandate compliance with all
applicable anti-bribery laws. Further, we require our partners, subcontractors, agents and others who work for us or on our behalf to comply with the FCPA and other anti-bribery laws. Although we have
policies and procedures and a compliance program designed to ensure that we, our employees, associates, distributors, agents and others who work with us in foreign countries comply with the FCPA and
other anti-bribery laws, there
is no assurance that such policies or procedures will protect us against liability under the FCPA or other laws for actions taken by our agents, employees and intermediaries. If we are found to be
liable for violations of these acts (either due to our own acts or our inadvertence or due to the acts or inadvertence of others), we could incur severe criminal or civil penalties or other sanctions,
which could have a material adverse effect on our reputation, business, results of operations or cash flows. In addition, detecting, investigating and resolving actual or alleged violations of these
acts is expensive and could consume significant time and attention of our senior management. For a discussion of the risks associated with the internal investigation, see An internal
investigation of our China operations is being conducted.
We
believe that our ability to achieve future growth is dependent in part on our ability to continue our international expansion efforts. There can be no assurance, however, that we will
be able to grow in our existing international markets, enter new international markets on a timely basis, or that new markets will be profitable. We must overcome significant regulatory and legal
barriers before we can begin marketing in any international market. Also, before marketing commences in a new country or market, it is difficult to assess the extent to which our products and sales
techniques will be accepted or successful in any given country. In addition to significant regulatory barriers, we may also encounter problems conducting operations in new markets with different
cultures and legal systems from those encountered elsewhere. We may be required to reformulate certain of our products before commencing sales in a given country. Once we have entered a market, we
must adhere to the regulatory and legal requirements of that market. No assurance can be given that we will be able to successfully reformulate our products in any of our current or potential
international markets to meet local regulatory requirements or to attract local customers. Our failure to do so could have a material adverse effect on our business, financial condition, or results of
operations. There can be no assurance that we will be able to obtain and retain necessary permits and approvals in new markets or that we will have sufficient capital to finance our expansion efforts
in a timely manner.
In
many market areas, other network marketing companies already have significant market penetration, the effect of which could be to desensitize the local Associate population to a new
opportunity, such as USANA, or to make it more difficult for us to attract qualified Associates. Even if we are able to commence operations in new markets, there may not be a sufficient population of
persons who are interested in our network marketing system. We believe our future success will depend in part on our ability to seamlessly integrate our Compensation Plan across all markets where
legally permissible. There can be no assurance, however, that we will be able to utilize our Compensation Plan seamlessly in all existing or future markets. For example, in August 2010, we indirectly
acquired BabyCare, a nutritional supplement company that is now licensed by the government of China to engage in direct selling in twelve municipalities/provinces the eight most recent of which are
subject to BabyCare's satisfaction of certain conditions and reporting requirements. In accordance with Chinese law, we utilize a compensation plan that has been designed specifically for China and
implemented by BabyCare separately from our Compensation Plan in our other markets.
An internal investigation of our China operations is being conducted.
We are voluntarily conducting an internal investigation of
our China
operations, BabyCare Ltd. The investigation focuses on
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compliance
with the FCPA and certain conduct and policies at BabyCare, including BabyCare's expense reimbursement policies. The Audit Committee of the Board of Directors has assumed direct
responsibility for reviewing these matters and has hired experienced counsel to conduct the investigation. While we do not believe that the subject amounts are quantitatively material or will
materially affect our financial statements, we cannot currently predict the outcome of the investigation on our business, results of operations or financial condition. We have voluntarily contacted
the Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) to advise both agencies that an internal investigation is underway and we intend to provide additional
information to both agencies as the investigation progresses. Because the internal investigation is in its early stage, we cannot predict the duration, scope, or result of the investigation.
We
could be exposed to a variety of negative consequences as a result of these matters. One or more governmental actions could be instituted in respect of the matters that are the
subject of the internal investigation, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, criminal penalties, or other relief.
Several civil lawsuits have been initiated as a result of these matters and we cannot predict whether they may result in judgments against us and potentially any responsible current and former
directors and officers. We expect to continue to incur costs in conducting our on-going review and investigation, in responding to requests for information in connection with any government
investigations and in defending any potential civil or governmental proceedings that are instituted against us or any of our current or former officers or directors.
Fluctuation in the value of currency exchange rates with the U.S. dollar affects our operations and our net sales and earnings.
Over the past several
years, a majority of our net sales have been generated outside the United States. Such sales for the year ended December 31, 2016 represented 87.0% of our total net sales. We will likely
continue to expand our operations into new markets, exposing us to expanding risks of changes in social, political, and economic conditions, including changes in the laws and policies that govern
investment or exchange in these markets. Because a significant portion of our sales are generated outside the United States, exchange rate fluctuations will have a significant effect on our sales and
earnings. Further, if exchange rates fluctuate dramatically, it may become uneconomical for us to establish or to continue activities in certain countries. For instance, changes in currency exchange
rates may affect the relative prices at which we and our competitors sell similar products in the same market. As our business expands outside the United States, an increasing share of our net sales
and operating costs will be transacted in currencies other than the U.S. dollar. Accounting practices require that our non-U.S. financial results be converted to U.S. dollars for reporting purposes.
Consequently, our reported net earnings may be significantly affected by fluctuations in currency exchange rates, with earnings generally increasing with a weaker U.S. dollar and decreasing with a
strengthening U.S. dollar. Product purchases by our subsidiaries are transacted in U.S. dollars. As our operations expand in countries where transactions may be made in currencies other than the U.S.
dollar, our operating results will be increasingly subject to the risks of exchange rate fluctuations and we may not be able to accurately estimate the impact that these changes might have on our
future business, product pricing, results of operations, or financial condition. In addition, the value of the U.S. dollar in relation to other currencies may also adversely affect our sales to
customers outside the United States. Currently our
strategy for reducing our exposure to currency fluctuation includes the timely and efficient repatriation of earnings from international markets where such earnings are not considered to be
indefinitely reinvested, and settlement of intercompany transactions. We also from time to time enter into currency exchange contracts to offset foreign currency exposure in various international
markets. We do not use derivative instruments for speculative purposes. There can be no assurance that we will be successful in protecting our operating results or cash flows from potentially adverse
effects of currency exchange fluctuations. Any such adverse effects could also adversely affect our business, financial condition, or results of operations.
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Difficult economic conditions may adversely affect our business.
Over the past few years, economic conditions in many of the
markets where we sell
our products have resulted in challenges to our business. This is particularly true in our Americas and Europe region, where, although we have seen a recent improvement, we continue to experience
difficulty generating meaningful growth. We cannot predict whether world or market-specific economies will improve or deteriorate in the future. If difficult economic conditions continue or worsen, we
could experience declines in net sales, profitability and cash flow due to lower demand for our products or other factors caused by economic challenges faced by our customers, potential customers or
suppliers. Additionally, these conditions may result in a material adverse effect on our liquidity and capital resources or otherwise negatively impact our operations or overall financial condition.
Our business is subject to the effects of adverse publicity and negative public perception.
Our ability to attract and retain
Associates and to
sustain and enhance sales through our Associates can be affected by adverse publicity or negative public perception regarding our industry, our competition, or our business generally. Our business
prospects, financial condition and results of operations could be adversely
affected if our public image or reputation were to be tarnished by negative publicity including dissemination via print, broadcast or social media, or other forms of Internet-based communications.
This negative public perception may include publicity regarding the legality of network marketing, the quality or efficacy of nutritional supplement products or ingredients in general or our products
or ingredients specifically, and regulatory investigations, regardless of whether those investigations involve us or our Associates or the business practices or products of our competitors or other
network marketing companies.
In
2007, we were the victim of false statements made to the press and regulatory agencies, causing us to incur significant expense in defending and dispelling the allegations during 2007
and 2008. More recently, in November 2012, we were again the target of false and misleading statements concerning our business practices, particularly in China and Hong Kong. This adverse publicity
also had an adverse impact on the market price of our stock and caused insecurity among our Associates.
Additionally,
there has been significant media and short-seller attention regarding the viability and legality of network marketing in the United States and internationally over the past
few years. This attention has led to intense public scrutiny of the industry, as well as volatility in our stock price and the stock price of companies similar to ours. There can be no assurance that
we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition, or
results of operations.
Our Associate Compensation Plan, or changes we make to it, may be viewed negatively by some Associates, could fail to achieve our desired objectives, and could have a negative
impact on
our business.
Our line of business is highly competitive and sensitive to the introduction of new competitors, new products and/or new distributor compensation
plans. Network marketing companies commonly attempt to attract new distributors by offering generous distributor compensation plans. From time to time, we modify components of our Compensation Plan in
an effort to (i) keep it competitive and attractive to existing and potential Associates, (ii) cause or address a change in Associate behavior, (iii) incent Associates to grow our
business, (iv) conform to legal and regulatory requirements, and (v) address other business needs. In light of the size and diversity of our Associate force and the complexity of our
Compensation Plan, it is difficult to predict how any changes to the plan will be viewed by Associates and whether such changes will achieve their desired results. In 2013, we made several changes to
our product pricing structure and Associate Compensation Plan to improve our business, including to increase Associate loyalty and satisfaction and to attract new Associates. There can be no assurance
that the foregoing changes, or any future changes, to our Associate Compensation Plan will allow us to successfully attract new Associates or retain existing Associates, nor can we assure that any
changes we make to our Compensation Plan will achieve our desired results.
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Additionally,
the payment of Associate incentives under our Compensation Plan is our most significant expense. These incentives include commissions, bonuses, and certain awards and
prizes. Adjusting or enhancing our Compensation Plan directly affects the incentives we pay as a percentage of net sales. We may periodically adjust our Compensation Plan to prevent Associate
incentives from having a significant adverse effect on our earnings. There can be no assurance that changes to the Compensation Plan or product pricing will be successful in achieving target levels of
Associate incentives as a percentage of net sales. Furthermore, such changes may make it difficult to attract and retain qualified and motivated Associates or cause us to lose some of our
longer-standing Associates.
Legal action by former Associates or third parties against us could harm our business.
We continually monitor and review our
Associates' compliance
with our policies and procedures as well the laws and regulations applicable to our business. From time to time, some Associates fail to adhere to our policies and procedures. If this happens, we may
take disciplinary action against the particular Associate. This disciplinary action is based on the facts and circumstances of the particular case and may include anything from warnings for minor
violations to termination of an Associate's purchase and distribution rights for more serious violations. From time to time, we become involved in litigation with an Associate whose purchase and
distribution rights have been terminated. We consider this type of litigation to be routine and incidental to our business. While neither the existence nor the outcome of this type of litigation is
typically material to our business, in the past we have been involved in litigation of this nature that resulted in a large cash award against the Company. Our competitors have also been involved in
this type of litigation, and in some cases class actions, where the result has been a large cash award against the competitor or a large cash settlement by the competitor. These types of challenges,
awards or settlements could provide incentives for similar actions by other former Associates against us in the future. Any such challenge involving us or others in our industry could harm our
business by resulting in fines or damages against us, creating adverse publicity about us or our industry, or hurting our ability to attract and retain customers. We believe that Associate compliance
is critical to the integrity of our business, and, therefore, we will continue to be aggressive in ensuring that our Associates comply with our policies and procedures. As such, there can be no
assurance that this type of litigation will not occur again in the future or result in an award or settlement that has a materially adverse effect on our business.
The inability to obtain adequate supplies of raw materials for products at favorable prices, or at all, or the inability to obtain certain products from third-party suppliers,
could have
a material adverse effect on our business, financial condition, or results of operations.
We acquire all of our raw materials for the manufacture of our products
from third-party suppliers. Materials used in manufacturing our products are purchased through purchase order, often invoking pre-negotiated annual supply agreements. We have very few long-term
agreements for the supply of these materials. We also contract with third-party manufacturers and suppliers for the production of some of our products, including most of our gelatin-capsuled
supplements, Probiotic, Rev3 Energy Drink, our powdered drink mixes and nutrition bars, and certain of our personal care products. These third-party suppliers and manufacturers produce
and, in most cases, package these products according to formulations that have been developed by, or in conjunction with, our in-house product development team. There is a risk that any of our
suppliers or manufacturers could discontinue manufacturing our products or selling their products to us. Although we believe that we could establish alternate sources for most of our products, any
delay in locating and establishing relationships with other sources could result in product shortages
or back orders for products, with a resulting loss of net sales. In certain situations, we may be required to alter our products or to substitute different products from another source. We have, in
the past, discontinued or temporarily stopped sales of certain products that were manufactured by third parties while those products were on back order. There can be no assurance that suppliers will
provide the raw materials or manufactured products that are needed by us in the quantities that we request or at the prices that we are willing to pay. Because we do not control the actual production
of certain raw materials and products, we are also subject to delays caused by any interruption in the production of these materials,
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based
on conditions not within our control, including weather, crop conditions, transportation interruptions, strikes by supplier employees, and natural disasters or other catastrophic events.
Shortages of raw materials may temporarily adversely affect our margins or our profitability related to the sale of those products.
In the past, we
have experienced temporary shortages of the raw materials used in certain of our nutritional products. Although we had identified multiple sources to supply such raw material ingredients, quantities
of the materials we purchased during these shortages were at higher prices, which had a negative impact on our gross margins for those products. While we periodically experience price increases due to
unexpected raw material shortages and other unanticipated events, we have been able to manage this by increasing the price at which we sell our products, therefore, this has historically not resulted
in a material effect on our overall cost of goods sold. However, there is no assurance that our raw materials will not be significantly adversely affected in the future, causing our profitability to
be reduced.
Disruptions to shipping channels that we use to distribute our products to international warehouses may adversely affect our margins and profitability in those
markets.
In the past, we have felt the impact of disruptions to the shipping channels used to distribute our products. These disruptions have included increased
port congestion, a lack of capacity on the railroads, and a shortage of manpower. Most recently, we experienced the impact of the West Coast port congestion that started late in 2014 due to worker
strikes. In response to this congestion, we increased lead-times for shipments to our international markets, which caused an increase in our inventory levels. We also pursued alternative routes of
transportation, which increased our shipping costs. Although the west coast ports are now fully functioning, we cannot assure you that we will not experience port congestion in the future. Congestion
to ports can affect previously negotiated contracts with shipping companies, resulting in unexpected increases in shipping costs and reduction in our net sales.
Nutritional supplement products may be supported by only limited availability of conclusive clinical studies.
Our products
include nutritional
supplements that are made from vitamins, minerals, herbs, and other substances for which there is a long history of human consumption. Some of our products contain innovative ingredients or
combinations of ingredients. Although we believe that all of our products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product
ingredients or combinations of ingredients in concentrated form. We conduct research and test the formulation and production of our products, but we have performed or sponsored only limited clinical
studies. Furthermore, because we are highly dependent on consumers' perception of the efficacy, safety, and quality of our products, as well as similar products distributed by other companies, we
could be adversely affected in the event that those products prove or are asserted to be ineffective or harmful to consumers or in the event of adverse publicity associated with any illness or other
adverse effects resulting from consumers' use or misuse of our products or similar products of our competitors.
Our business is subject to the risks associated with intense competition from larger, wealthier, and more established competitors.
We face intense
competition in the business of distributing and marketing nutritional supplements, vitamins and minerals, personal care products, and other nutritional products, as described in greater detail in
"BusinessCompetition." Numerous manufacturers, distributors, and retailers compete actively for consumers and, in the case of other network marketing companies, for Associates. There can
be no assurance that we will be able to compete in this intensely competitive environment. In addition, nutrition and personal care products can be purchased in a wide variety of channels of
distribution, including retail stores. Also, entry is not particularly capital intensive or otherwise subject to high barriers to entry; as a result, new competitors can enter fairly easily and
compete with us for customers and our Associates. Our product offerings in each product category are also relatively small, compared to the wide variety of products offered by many of our competitors.
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We
are also subject to significant competition from other network marketing organizations for the time, attention, and commitment of new and existing Associates. Our ability to remain
competitive depends, in significant part, on our success in recruiting and retaining Associates. There can be no assurance that our programs for recruiting and retaining Associates will be successful.
The pool of individuals who may be interested in network marketing is limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals
into their businesses. Although we believe we offer an attractive opportunity for Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing
Associates or deplete the pool of potential Associates in a given market. This risk is compounded by the relative ease with which our Associates can exit our network marketing program.
Taxation and transfer pricing considerations affect our operations.
In many countries, including the United States, we are
subject to transfer
pricing and other tax regulations that are designed to ensure that appropriate levels of income are reported by our U.S. and foreign entities and are taxed appropriately. Although we believe that we
are in compliance with all material regulations and restrictions in this regard, we are subject to the risk that taxing authorities could audit our transfer pricing and related practices and assert
that additional taxes are owed. We are also subject to the risk that taxing authorities in any of our markets could change the laws in a manner that may increase our effective tax rate and/or duties
on our products. Under tax treaties, we are eligible to receive foreign tax credits in the United States for foreign taxes paid abroad. In the event any audits or assessments are concluded adversely
to us, we may or may not be able to offset the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Currently, we are utilizing all foreign tax credits in
the year in which they arise. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be
able to take advantage of any foreign tax credits in the future. As a result, adverse outcomes in these matters could have a material impact on our financial condition or operating results.
Our business is subject to particular intellectual property risks.
Most of our products are not protected by patents. The
labeling regulations
governing our nutritional supplements require that the ingredients of such products be precisely and accurately indicated on product containers. Accordingly, patent protection for nutritional
supplements often is impractical given the large number of manufacturers who produce nutritional supplements having many active ingredients in common. Additionally, the nutritional supplement industry
is characterized by rapid change and frequent reformulations of products, as the body of scientific research and literature refines current understanding of the application and efficacy of certain
substances and the interactions among various substances. In this respect, we maintain an active research and development program that is devoted to developing better, purer, and more effective
formulations of our products. We protect our investment in research, as well as the techniques we use to improve the purity and effectiveness of our products, by relying on trade secret laws. We have
also entered into confidentiality agreements with certain of our employees involved in research and development activities. Additionally, we endeavor to seek, to the fullest extent permitted by
applicable law, trademark and trade dress protection for our products, which protection has been sought in the United States, Canada, and in many of the other countries in which we are either
presently operating or plan to commence operations in the future. Notwithstanding our efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be
successful. Nor can there be any assurance that third-parties will not assert claims against us for infringement of their intellectual proprietary rights. If an infringement claim is asserted, we may
be required to obtain a license of such rights, pay royalties on a retrospective or prospective basis, or terminate our manufacturing and marketing of our infringing products. Litigation with respect
to such matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition, or operating results.
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A failure of our information technology systems would harm our business.
The global nature of our business and our seamless
global compensation plan
requires the development and implementation of robust and efficiently functioning information technology systems. Such systems are vulnerable to a variety of potential risks, including damage or
interruption resulting from natural disasters and telecommunication failures and human error or intentional acts of sabotage, vandalism, break-ins and similar acts. Although we have adopted and
implemented a business continuity and disaster recovery plan, which includes routine back-up, off-site archiving and storage, and certain redundancies, the occurrence of any of these events could
result in costly interruptions or failures adversely affecting our business and the results of our operations.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to
suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that
of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance
and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by
hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost
or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory
penalties, disrupt our operations, and damage our reputation, which could adversely affect our business, revenues and competitive position.
We may incur liability under our "Athlete Guarantee" program, if and to the extent participating athletes make a successful claim against USANA for testing positive for certain
banned
substances while taking USANA nutritional supplements.
USANA believes that its nutritional supplement products are free from substances that have been banned by
world-class training and competitive athletic programs. We retain independent testing agencies to conduct periodic checks for banned substances. We further believe that, while our products promote
good health, they are not otherwise considered to be "performance enhancing" as that term has been used in defining substances that are banned from use in international competition by the World
Anti-Doping Agency ("WADA"). For many years, USANA has been a sponsor of Olympic athletes and professional competitors around the world. These athletes have been tested on many occasions and have
never tested positive for banned substances as a result of taking USANA nutritional products. To back up our claim that athletes who use USANA products as part of their training regimen will not be
consuming banned substances, we have offered to enter into agreements with select athletes, some of whom have high-profiles and are highly compensated, which state that, during the term of the
agreement, should the athlete test positive for a banned substance included in the WADA, and should such positive result be the result of taking USANA nutritional products, we will compensate that
athlete at an amount equal to two times their current annual earnings up to $1.0 million dollars, based on the athlete's personal level of competition, endorsement, and other income, as well as
other factors. To mitigate potential exposure under these agreements, we:
-
-
Designate lots identified as dedicated to the Athlete Guarantee program and retain additional samples;
-
-
Store designated lot samples externally with a third-party; and
-
-
Establish a chain of custody that requires signatures on behalf of USANA and the third-party to transfer possession of the product lots and
that restricts access by USANA employees after the transfer.
All
applicants to this Athlete Guarantee program are subject to screening and acceptance by the Company in its sole discretion. Contracts are tailored to fit the athlete's individual
circumstances and
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the
amount of our exposure is limited based on the level of sponsorship of the participating athlete. Although we believe that the pool of current and potential participants in the program is small,
there is no guarantee that an athlete who is accepted in the program will not successfully make a claim against us. We currently have no insurance to protect us from potential claims under this
program.
The loss of key management personnel could adversely affect our business.
Our executive officers are primarily responsible for
our day-to-day
operations, and we believe 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. In November 2016, we transitioned from a co-chief executive officer leadership structure so that we now operate with a chief executive officer. We depend
upon the services of our Chief Executive Officer, Kevin Guest, our President and Chief Operating Officer, Jim Brown and our Chief Financial Officer, Paul Jones, as well as other key members of our
executive team. We cannot guarantee continued service by our key executive officers. We do not maintain key man life insurance on any of our executive officers, nor do
we have an employment agreement with any of our executive officers. The loss or limitation of the services of any of our executive officers or the inability to attract additional qualified management
personnel could have a material adverse effect on our business, financial condition, or results of operations.
Failure to maintain effective internal controls in accordance with the Sarbanes-Oxley Act of 2002 could negatively impact our business.
We are
required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management
assessments of the effectiveness of internal control over financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report by management on the effectiveness of our internal control
over financial reporting in the companies' Annual Reports on Form 10-K. In addition, our independent registered public accounting firm must report on the effectiveness of the internal control
over financial reporting. Although we review internal control over financial reporting in order to ensure compliance with the Section 404 requirements, if we fail to maintain effective internal
control over financial reporting, we could be required to take costly and time-consuming corrective measures, to remedy any number of deficiencies, significant deficiencies or material weaknesses, be
required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by
security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price
of our stock and in our ability to raise additional financing if needed in the future.
We identified a material weakness in our internal control over financial reporting and our business and stock price may be adversely affected if we do not adequately address this
material weakness or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
As described in our
Management's Annual Report on Internal Control Over Financial Reporting at Item 9A of this Annual Report on Form 10-K, we identified a material weakness in our internal control over
financial reporting as of our fiscal year ended December 31, 2016. The existence of this or one or more material weaknesses or significant deficiencies could result in errors in our financial
statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we do not complete the evaluation, remediation and testing of our internal controls on
a timely basis in the future, we will be unable to conclude that our internal controls are effective and our independent registered public accounting firm will be unable to express an unqualified
opinion on the effectiveness of our internal controls. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our
stock could decline and we could be
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subject
to sanctions or investigations by the SEC, NYSE or other regulatory authorities, and our business and financial condition could be materially adversely affected.
The beneficial ownership of a significant percentage of our common stock gives our founder and parties related to or affiliated with him effective control, and limits the
influence of
other shareholders on important policy and management issues.
Gull Global, Ltd., an entity that is solely owned and controlled by our founder
Dr. Wentz, owned 51.45% of our outstanding common stock at December 31, 2016. By virtue of this stock ownership, Dr. Wentz is able to exert significant influence over the election
of the members of our Board of Directors and our business affairs. This concentration of ownership could also have the effect of delaying, deterring, or preventing a change in control that might
otherwise be beneficial to shareholders. In addition, Dr. Wentz currently serves as Chairman of our Board of Directors. There can be no assurance that conflicts of interest will not arise with
respect to these relationships or that conflicts will be resolved in a manner favorable to other shareholders of the Company.
Sales by our shareholders of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common
stock.
A large number of outstanding shares of our common stock are held by several of our principal shareholders. If any of these principal shareholders were to
decide to sell large amounts of stock over a short period of time such sales could cause the market price of our common stock to decline.
Our stock price has been volatile and subject to various market conditions.
There can be no assurance that an active market in
our stock will be
sustained. The trading price of our common stock has been subject to wide fluctuations. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot
predict the extent to which investors' interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we are vulnerable to investors taking a "short
position" in our common stock, which is likely to have a depressing effect on the price of our common stock and add increased volatility to our trading market. The price of our common stock also may
fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, governmental regulatory action, conditions in the
nutritional supplement industry, negative publicity, or other events or factors, many of which are beyond our control. In addition, the stock market has historically experienced significant price and
volume fluctuations, which have particularly affected the market prices of many dietary and nutritional supplement companies and which have, in certain cases, not had a strong correlation to the
operating performance of these companies. Our operating results in future quarters may be below the expectations of securities analysts and investors. If that were to occur, the price of our common
stock, and accordingly, the value of a shareholder's investment in our company, would likely decline, perhaps substantially.