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_________________________________________________________________

 

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

(Exact name of Registrant as specified in its charter) 

Utah						87-0327982
(State or other jurisdiction of						(IRS Employer
incorporation or organization)						Identification No.)

 

(Address of principal executive offices and zip code)

 

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, no par value			NATR			Nasdaq Capital Market

 

Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ý  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o						Accelerated filer  ☒
Non-accelerated filer  o						Smaller reporting company ☒
						Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No ý.

 

The number of shares of Common Stock, no par value, outstanding on October 20, 2023, was 19,075,041 shares.

 

 

 

Part I. Financial Information									4
			Item 1.			Financial Statements (Unaudited)			4
						Condensed Consolidated Balance Sheets			4
						Condensed Consolidated Statements of Operations			5
						Condensed Consolidated Statements of Comprehensive Income (Loss)			7
						Condensed Consolidated Statements of Changes in Shareholders’ Equity			8
						Condensed Consolidated Statements of Cash Flows			10
						Notes to Condensed Consolidated Financial Statements			11
			Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
			Item 3.			Quantitative and Qualitative Disclosures about Market Risk			31
			Item 4.			Controls and Procedures			31
Part II. Other Information									33
			Item 1.			Legal Proceedings			33
			Item 1A.			Risk Factors			33
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			33
			Item 3.			Defaults Upon Senior Securities			33
			Item 4.			Mine Safety Disclosures			33
			Item 5.			Other Information			33
			Item 6.			Exhibits			34

 

Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans, strategies and financial results, including expected improvement in gross profit and gross margin. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. For example, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are more fully described in this report, including the risks set forth under “Risk Factors” in Item 1A, and in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, but include the following:

•extensive government regulations to which the Company’s products, business practices and manufacturing activities are subject;

•registration of products for sale in foreign markets, or difficulty or increased cost of importing products into foreign markets;

•legal challenges to the Company’s direct selling program or to the classification of its independent consultants;

•laws and regulations regarding direct selling may prohibit or restrict our ability to sell our products in some markets or require us to make changes to our business model in some markets;

•liabilities and obligations arising from improper activity by the Company’s independent consultants;

•product liability claims;

•impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;

•the Company’s ability to attract and retain independent consultants;

•the loss of one or more key independent consultants who have a significant sales network;

•the Company’s joint venture for operations in China with Fosun Industrial Co., Ltd.;

•the effect of fluctuating foreign exchange rates;

•failure of the Company’s independent consultants to comply with advertising laws;

•changes to the Company’s independent consultants compensation plans;

•geopolitical issues and conflicts;

•adverse effects caused by the ongoing coronavirus pandemic;

•negative consequences resulting from difficult economic conditions, including the availability of liquidity or the willingness of the Company’s customers to purchase products;

•risks associated with the manufacturing of the Company’s products;

•supply chain disruptions, manufacturing interruptions or delays, or the failure to accurately forecast customer demand;

•failure to timely and effectively obtain shipments of products from our manufacturers and deliver products to our independent consultants and customers;

•world-wide slowdowns and delays related to supply chain, ingredient shortages and logistical challenges;

•uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;

•changes in tax laws, treaties or regulations, or their interpretation;

•failure to maintain an effective system of internal controls over financial reporting;

•cybersecurity threats and exposure to data loss;

•the storage, processing, and use of data, some of which contain personal information, are subject to complex and evolving privacy and data protection laws and regulations;

•reliance on information technology infrastructure; and

•the sufficiency of trademarks and other intellectual property rights.

All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, we refer to Nature’s Sunshine Products, Inc., together with our subsidiaries, as "we," "us," "our," "our Company" or “the Company.”

 

Item 1. FINANCIAL STATEMENTS

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

			Nine Months Ended September 30,
			2023						2022
Net income (loss)			$	7,072					$	(1,534)
Foreign currency translation loss (net of tax)			(3,491)						(5,976)
Total comprehensive income (loss)			$	3,581					$	(7,510)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

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

 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation of our financial information as of September 30, 2023, and for the three and nine-month periods ended September 30, 2023 and 2022. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2023.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities, in these financial statements and accompanying notes. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations.

The significant accounting estimates inherent in the preparation of our financial statements include estimates associated with our determination of liabilities related to independent consultant incentives, the determination of income tax assets and liabilities, certain other non-income tax and value-added tax contingencies, and legal contingencies. In addition, significant estimates form the basis for allowances with respect to inventory valuations. Various assumptions and other factors enter into the determination of these significant estimates. The process of determining significant estimates takes into account historical experience and current and expected economic conditions.

Noncontrolling interests changed as a result of the net income attributable to noncontrolling interests of $0.3 million and $1.0 million for the three and nine months ended September 30, 2023, respectively. Net income attributable to the noncontrolling interests was $0.1 million and $0.8 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023 and December 31, 2022, noncontrolling interests were $5.1 million and $4.1 million, respectively.

 

No new accounting pronouncement issued or effective during the three months ended September 30, 2023, had, or is expected to have, a material impact on our condensed consolidated financial statements.

 

The composition of inventories is as follows (dollar amounts in thousands):

			September 30, 2023						December 31, 2022
Raw materials			$	18,650					$	23,133
Work in progress			1,465						1,713
Finished goods			46,172						43,103
Total inventories			$	66,287					$	67,949

 

Our trading securities portfolio totaled $0.7 million at September 30, 2023, and $0.7 million at December 31, 2022, and generated losses of $26,000 and $25,000 for the three months ended September 30, 2023 and 2022, respectively, and gains of $0.1 million and losses of $0.2 million for the nine months ended September 30, 2023 and 2022, respectively.

 

On July 11, 2017, we entered into a revolving credit agreement with Bank of America, N.A., with a borrowing limit of $25.0 million (the “Credit Agreement”). On June 23, 2022 the Credit Agreement was amended to extend the term to mature on July 1, 2027 and allows for additional borrowings of $25.0 million or up to three separate increases of no less than $5.0 million each, subject to the lender's due diligence. The amendment to the Credit Agreement also modified the calculation of interest. Interest under the amended Credit Agreement is the greater of BSBY Daily Floating Rate or the Index Floor, plus 1.50 percent (6.89 percent as of September 30, 2023), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. At September 30, 2023 and December 31, 2022, there was no outstanding balance under the Credit Agreement.

The Credit Agreement contains customary financial covenants, including financial covenants relating to our solvency and leverage. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, mergers, consolidations and transfers of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by our manufacturing facility, accounts receivable, inventories and other assets. As of September 30, 2023, we were in compliance with the debt covenants set forth in the Credit Agreement.

On April 21, 2020, we entered into a credit agreement with Banc of America Leasing and Capital, LLC, with a borrowing limit of $6.0 million (the "Capital Credit Agreement"). On November 19, 2020, we executed on the Capital Credit Agreement and borrowed $3.7 million. We pay interest on any borrowings under the Capital Credit Agreement at a fixed rate of 3.00 percent and are required to settle our borrowings under the Capital Credit Agreement in 36 monthly payments of $0.1 million. The Capital Credit Agreement is collateralized by any new equipment purchased under the agreement. As of September 30, 2023, there was $0.2 million outstanding balance under the Capital Credit Agreement, of which $0.2 million was classified as current.

 

Basic net income per common share (“Basic EPS”), is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income per common share.

Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and nine months ended September 30, 2023 and 2022 (dollar and share amounts in thousands, except for per share information):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Net income (loss) attributable to common shareholders			$	2,832					$	90					$	6,114					$	(2,344)
Basic weighted average shares outstanding			19,133						19,198						19,093						19,384
Basic earnings (loss) per share attributable to common shareholders			$	0.15					$	—					$	0.32					$	(0.12)
Diluted shares outstanding:
Basic weighted-average shares outstanding			19,133						19,198						19,093						19,384
Stock-based awards			359						284						357						—
Diluted weighted-average shares outstanding			19,492						19,482						19,450						19,384
Diluted earnings (loss) per share attributable to common shareholders			$	0.15					$	—					$	0.31					$	(0.12)
Dilutive shares excluded from diluted-per-share amounts:
Share-based awards			735						576						735						—
Anti-dilutive shares excluded from diluted-per-share amounts:
Share-based awards			25						25						50						576			(1)

_________________________________________

(1)     As a result of the net loss for the nine months ended September 30, 2022, no potentially dilutive securities are included in the calculation of diluted loss per share because such effect would be anti-dilutive. Potentially dilutive securities for the nine months ended September 30, 2022 include 576 restricted stock units.

Potentially dilutive shares excluded from diluted-per-share amounts include performance-based restricted stock units, for which certain metrics have not been achieved. Potentially anti-dilutive shares excluded from diluted-per-share amounts include both non-qualified stock options and unearned performance-based options to purchase shares of common stock with exercise prices greater than the weighted-average share price during the period and shares that would be anti-dilutive to the computation of diluted net income per share for each of the periods presented.

 

 

The declaration of future dividends is subject to the discretion of our Board of Directors and will depend upon various factors, including earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

On March 10, 2021, we announced a $15.0 million common share repurchase program. On March 8, 2022 we announced an amendment to the share repurchase program allowing the repurchase of an additional $30.0 million in common shares. The repurchases may be made from time to time as market conditions warrant and are subject to regulatory considerations. For the nine months ended September 30, 2023 and 2022, we repurchased 180,000 and 834,000 shares of our common stock for $2.2 million and $12.9 million, respectively. At September 30, 2023, the remaining balance available for repurchases under the program was $21.8 million.

 

During the year ended December 31, 2012, our shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan ("2012 Incentive Plan"). The 2012 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards. The Compensation Committee of the Board of Directors has authority and discretion to determine the type of award, as well as the amount, terms and conditions of each award under the 2012 Incentive Plan, subject to the limitations of the 2012 Incentive Plan. A total of 1,500,000 shares of our common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In 2015, our shareholders approved an amendment to the 2012 Incentive Plan, to increase the number of shares of common stock reserved for issuance by 1,500,000 shares. On May 5, 2021, our shareholders approved the Amended and Restated 2012 Stock Incentive Plan, which among other amendments, increased the number of shares of common stock reserved for issuance by 2,000,000 shares. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the Amended and Restated 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.

 

 

Our outstanding stock options include time-based stock options, which vest over differing periods of time ranging from the date of issuance to up to 48 months from the option grant date, and performance-based stock options, which have already vested upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options.

 

Stock option activity for the nine-month period ended September 30, 2023, is as follows (amounts in thousands, except per share information):

			Number of Shares						Weighted Average Exercise Price Per Share						Weighted Average Grant Date Fair Value
Options outstanding at December 31, 2022			143						$	12.72					$	5.28
Granted			—						—						—
Forfeited or canceled			(41)						14.59						7.02
Exercised			(27)						13.88						6.53
Options outstanding at September 30, 2023			75						$	11.25					$	3.85

There was no share-based compensation expense for the three- and nine-month periods ended September 30, 2023 and 2022. As of September 30, 2023 and December 31, 2022, there was no unrecognized share-based compensation expense related to the grants described above.

At September 30, 2023, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 75,000 shares of common stock was $399,000. At December 31, 2022, the aggregate intrinsic value of outstanding and exercisable options to purchase 143,000 shares of common stock was $0.

For the nine months ended September 30, 2023 and 2022, we issued 27,000 and 29,000 shares of common stock upon the exercise of stock options at an average exercise price of $13.88 and $9.17 per share, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022, was $0.1 million and $0.3 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized $0.1 million and $0.1 million of tax benefits from the exercise of stock options, respectively.

As of September 30, 2023 and December 31, 2022, we did not have any unvested stock options outstanding.

 

 

Our outstanding restricted stock units (“RSUs”), include time-based RSUs, which vest over differing periods of time ranging from 12 months to up to 36 months from the RSU grant date, as well as performance-based RSUs, which vest upon achieving targets relating to adjusted EBITDA growth, and/or stock price levels. RSUs granted to members of the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At September 30, 2023 and December 31, 2022, there were 90,000 and 94,000 vested RSUs, respectively, granted to the Board of Directors with an accompanying restriction period.

Restricted stock unit activity for the nine-month period ended September 30, 2023, is as follows (amounts in thousands, except per share information):

			Number of Shares						Weighted Average Grant Date Fair Value
Restricted Stock Units outstanding at December 31, 2022			1,091						$	10.76
Granted			533						10.71
Forfeited			(45)						2.80
Issued			(204)						10.32
Restricted Stock Units outstanding at September 30, 2023			1,375						11.07

 

During the nine-month period ended September 30, 2023, we granted 533,000 RSUs under the 2012 Incentive Plan to the Board of Directors, executive officers and other employees, which were comprised of time-based RSUs, and share-priced and adjusted EBITDA performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $10.55 per share and vest in 12 monthly installments over a one year period from the grant date or in annual installments over a three-year period from the grant date. The adjusted EBITDA performance-based RSUs were issued with a weighted-average grant date fair value of $10.74 per share and vest upon achieving adjusted EBITDA targets and maintaining those targets over a four-quarter period from the grant date.

Except for share-priced performance RSUs, RSUs are valued at market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period. For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 11.9 percent for a common share.

Share-based compensation expense related to time-based RSUs for the three-month periods ended September 30, 2023 and 2022, was approximately $1.0 million and $0.3 million, respectively. Share-based compensation expense related to time-based RSUs for the nine-month periods ended September 30, 2023 and 2022, was approximately $2.9 million and $1.2 million, respectively. As of September 30, 2023 and December 31, 2022, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $3.5 million and $3.0 million, respectively. The remaining compensation expense is expected to be recognized over the weighted average period of approximately 0.8 years.

 

Share-based compensation expense related to performance-based RSUs for the three-month periods ended September 30, 2023 and 2022, was $0.3 million and $0.2 million, respectively. Share-based compensation expense related to performance-based RSUs for the nine-month periods ended September 30, 2023 and 2022, was $0.9 million and $0.7 million, respectively. Should we attain all of the metrics related to performance-based RSU grants, we would recognize up to $6.1 million of potential share-based compensation expense. We currently expect to recognize an additional $3.1 million of that potential share-based compensation expense.

The number of shares issued upon vesting of RSUs granted pursuant to our share-based compensation plans is net of the minimum statutory withholding requirements that we pay on behalf of our employees, which was 48,000 and 80,000 shares for the nine-month periods ended September 30, 2023 and 2022, respectively. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the repurchase program described above. 

 

We have four business segments (Asia, Europe, North America, and Latin America and Other) based primarily upon the geographic region where each segment operates, as well as the internal organization of our officers and their responsibilities. The geographic segments operate under the Nature’s Sunshine Products and Synergy WorldWide® brands. The Latin America and Other segment includes our wholesale business in which we sell products to various locally-managed entities independent of the Company that we have granted distribution rights for the relevant market.

Net sales for each segment have been reduced by intercompany sales as they are not included in the measure of segment profit or loss reviewed by the chief executive officer. We evaluate performance based on contribution margin by segment before consideration of certain inter-segment transfers and expenses.

Reportable business segment information is as follows (dollar amounts in thousands):

_________________________________________

(1)    Contribution margin consists of net sales less cost of sales and volume incentives expense.

(2)    Service fees in China totaled $4.0 million and $12.9 million for the three and nine-month periods ended September 30, 2023, respectively, compared to $2.5 million and $11.3 million for the three and nine-month periods ended September 30, 2022. These service fees are included in selling, general and administrative expenses.

From an individual country/region perspective, the United States, South Korea and Taiwan comprise 10 percent or more of consolidated net sales for the three and nine-month periods ended September 30, 2023 and 2022, as follows (dollar amounts in thousands):

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Net sales:
United States			$	32,240					$	29,077					$	96,314					$	93,789
South Korea			13,921						14,967						38,993						43,085
Taiwan			15,598						13,465						45,814						35,148
Other			49,443						46,997						155,263						147,139
			$	111,202					$	104,506					$	336,384					$	319,161

Net sales generated by each of our product lines is set forth below (dollar amounts in thousands):

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Asia
General health			$	16,937					$	14,705					$	48,859					$	40,010
Immune			1,964						654						3,738						2,779
Cardiovascular			14,963						14,626						44,698						41,498
Digestive			9,186						8,599						30,172						28,625
Personal care			1,376						2,758						4,159						7,384
Weight management			7,792						6,536						21,812						21,074
			52,218						47,878						153,438						141,370
Europe
General health			$	8,034					$	8,638					$	25,823					$	25,162
Immune			1,563						1,899						5,988						5,973
Cardiovascular			2,264						2,385						7,085						7,168
Digestive			5,087						4,849						17,156						14,921
Personal care			1,348						1,087						3,779						3,529
Weight management			473						470						1,579						1,451
			18,769						19,328						61,410						58,204
North America
General health			$	16,334					$	14,241					$	47,725					$	44,509
Immune			3,641						3,546						11,693						12,479
Cardiovascular			3,634						3,427						10,983						11,162
Digestive			8,577						8,096						26,069						25,734
Personal care			1,720						1,397						4,818						4,961
Weight management			886						797						2,810						2,722
			34,792						31,504						104,098						101,567
Latin America and Other
General health			$	1,480					$	1,597					$	4,717					$	5,012
Immune			611						709						2,023						2,225
Cardiovascular			392						438						1,291						1,250
Digestive			2,560						2,569						8,030						7,961
Personal care			284						329						976						1,050
Weight management			96						154						401						522
			5,423						5,796						17,438						18,020
			$	111,202					$	104,506					$	336,384					$	319,161

From an individual country perspective, only the United States comprised 10 percent or more of consolidated property, plant and equipment as follows (dollar amounts in thousands):

Total assets per segment is set forth below (dollar amounts in thousands):

 

The difference between the effective tax rate for the three and nine months ended September 30, 2023 compared to September 30, 2022 is primarily caused by recording more valuation allowance in the prior period against deferred tax assets which were not expected to provide a benefit.

Our U.S. federal income tax returns for 2019 through 2021 are open to examination for federal tax purposes. We have several foreign tax jurisdictions with open tax years from 2017 through 2022.

 

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although we believe our tax estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and operating results in the period in which we make such determination.

 

 

 

We are party to various legal proceedings and disputes. Management cannot predict the ultimate outcome of these matters, individually or in the aggregate, or their resulting effect on our business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. We maintain product liability, general liability and excess liability insurance coverage. However, insurance may not continue to be available at an acceptable cost to us, such coverage may not be sufficient to cover one or more large claims, or the insurers may successfully disclaim coverage as to a pending or future claim.

 

 

We have reserved for certain state sales and use tax and foreign non-income tax contingencies based on the likelihood of an obligation in accordance with accounting guidance for probable loss contingencies. Loss contingency provisions are recorded for probable losses at management’s best estimate of a loss, or when a best estimate cannot be made, a minimum loss contingency amount is recorded. We provide provisions for potential payments of tax to various tax authorities for contingencies related to non-income tax matters, including value-added taxes and sales tax. We provide provisions for U.S. state sales taxes in each of the states where we have nexus. As of September 30, 2023 and December 31, 2022, accrued liabilities were $0.3 million and $0.3 million, respectively, related to non-income tax contingencies. While we believe that the assumptions and estimates used to determine contingent liabilities are reasonable, the ultimate outcome of these matters cannot presently be determined. We believe future payments related to these matters could range from $0 to approximately $2.9 million.

 

 

We are a party to various other legal proceedings and disputes in the United States and foreign jurisdictions. As of September 30, 2023 and December 31, 2022, accrued liabilities were $0.5 million and $0.6 million, respectively, related to the estimated outcome of these proceedings. In addition, we are a party to other litigation where there is a reasonable possibility that a loss may be incurred, but either the losses are not considered to be probable or we cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided. We believe future payments related to these matters could range from $0 to approximately $0.3 million.

 

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values of each financial instrument. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table presents our hierarchy for our assets, measured at fair value on a recurring basis, as of September 30, 2023 (dollar amounts in thousands):

 

			Level 1						Level 2						Level 3
			Quoted Prices in Active Markets for Identical Assets						Significant Other Observable Inputs						Significant Unobservable Inputs						Total
Investment securities - trading			$	692					$	—					$	—					$	692
Total assets measured at fair value on a recurring basis			$	692					$	—					$	—					$	692

 

The following table presents our hierarchy for our assets, measured at fair value on a recurring basis, as of December 31, 2022 (dollar amounts in thousands):

 

Investment securities - trading — Our trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.

 

For the nine months ended September 30, 2023 and for the year ended December 31, 2022, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).

 

The carrying amounts reflected on the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying value of our debt approximates fair value due to its recent acquisition and short maturity. During the nine months ended September 30, 2023 and 2022, we did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

Net sales include sales of products and shipping and handling charges, net of estimates for product returns and any related sales incentives or rebates based upon historical information and current trends. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of our contracts have a single performance obligation and are short term in nature. Contracts with multiple performance obligations are insignificant. Sales taxes and value-added taxes in the United States and foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Amounts received for unshipped merchandise are recorded as deferred revenue. Amounts for membership fees are deferred and amortized as revenue over the life of the membership, primarily one year.

A reserve for product returns is recorded based upon historical experience and current trends. We allow independent consultants to return the unused portion of products within ninety days of purchase if they are not satisfied with the product. In some of our markets, the requirements to return product are more restrictive.

Amounts billed to customers for shipping and handling are reported as a component of net sales.

Volume incentives and other sales incentives or rebates are a significant part of our direct sales marketing program and represent commission payments made to independent consultants. These payments are designed to provide incentives for reaching higher sales levels. The amount of volume incentive expense recognized is determined based upon the amount of qualifying purchases in a given month and recorded as volume incentive expense. Payments to independent consultants for sales incentives or rebates related to their own purchases are recorded as a reduction of revenue. Some payments for sales incentives are processed daily; while others, including rebates, are calculated monthly based upon qualifying sales.

Our products are grouped into six principal categories: general health, immune, cardiovascular, digestive, personal care and weight management. We have four business segments that are based primarily upon the geographic region where each segment operates. Each of the geographic segments operate under the Nature’s Sunshine Products and Synergy WorldWide® brands. See Note 7, Segment Information, for further information on our reportable segments and presentation of disaggregated revenue by reportable segment and product category.

We have made the accounting policy election to treat shipping and handling as a fulfillment activity rather than a promised service under Topic 606.

On February 17, 2023, we became aware that Synergy Worldwide Japan G.K., a Japan entity and wholly owned subsidiary of the Company (“Synergy Japan”), was the victim of a criminal scheme involving employee impersonation and fraudulent requests targeting Synergy Japan. The criminal scheme resulted in a series of fraudulently induced wire transfers between February 1, 2023, and February 17, 2023 totaling $4.8 million. We promptly launched an investigation, led by an independent third party, to determine the full extent of the fraud scheme and related potential exposure. We self-discovered this fraudulent activity and promptly initiated contact with our bank as well as appropriate law enforcement authorities in an effort to, among other things, recover the transferred funds.

To date, we have not found any evidence of additional fraudulent activity and do not believe the incident resulted in any unauthorized access to confidential consumer information or other data maintained by the Company.

As a result of this matter, we incurred investigation and other professional fees of $1.0 million, which along with the initial $4.8 million loss, were recorded in Selling, General and Administrative expense for the nine months ended September 30, 2023. We do not expect this incident to otherwise have a material impact on our business.

Item 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

 

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

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

COVID-19

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

Eastern Europe

On February 24, 2022, Russian forces launched significant military action against Ukraine. There continues to be sustained conflict and disruption in the region, which is expected to endure for the foreseeable future. Our consultants in our Russia and Other market, a market within our Europe business segment that includes Russia, Ukraine, Belarus and other Common Independent States in the region, continue to operate their independent businesses, albeit at a reduced level than prior to the start of the conflict. For the nine months ended September 30, 2023 and 2022, we have recorded a pretax charge of $0 and $2.3 million, respectively, primarily related to the impairment of inventory, as well as accruals for contractual obligations related to Russian operations. We expect that this will continue to impact our business for the foreseeable future. We will continue monitoring the social, political, regulatory and economic environment in Ukraine and Russia, and will consider further actions as appropriate.

Net sales related to Eastern Europe for the three and nine months ended September 30, 2023, were $12.1 million and $41.3 million, respectively, compared to $13.3 million and $38.9 million for the same periods in 2022. Operating income related to Eastern Europe for the three and nine months ended September 30, 2023, was $0.8 million and $1.6 million, respectively, prior to the charges noted above, compared to $1.0 million and $3.2 million for the same periods in 2022. As of September 30, 2023, Eastern Europe had assets of $8.7 million.

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

Inflation

Like many other companies, we are facing significant inflationary pressures in the global economy. Our operations have been, and may continue to be, adversely impacted by inflation, primarily from higher costs of raw materials, labor, production, distribution and transportation costs.

Third Quarter Performance

In the third quarter of 2023, we experienced an increase in our consolidated net sales of 6.4 percent (or 7.1 percent in local currencies) compared to the same period in 2022. Asia net sales increased approximately 9.1 percent (or 12.4 percent in local currencies) compared to the same period in 2022. Europe net sales decreased approximately 2.9 percent (or 6.5 percent in local currencies) compared to the same period in 2022. North America net sales increased approximately 10.4 percent (or 10.7 percent in local currencies) compared to the same period in 2022. Latin America and Other net sales decreased approximately 6.4 percent (or 10.5 percent in local currencies) compared to the same period in 2022. The strengthening of the U.S. dollar versus the local currencies, primarily in our Asian markets, resulted in an approximate 0.7 percent, or $0.7 million, decrease of our net sales during the quarter.

Cost of sales increased $0.3 million during the three months ended September 30, 2023, compared to the same period in 2022, and as a percentage of net sales were 26.9 percent and 28.4 percent for the three months ended September 30, 2023 and 2022, respectively. The decrease in cost of sales percentage is primarily due to improvements in market mix, sales price increases, and contribution margin improvement initiatives, partially offset by increases related to inflation and unfavorable foreign currency exchange. Part of the decrease also relates to prior-year inventory valuation reserves taken as a result of the conflict between Russia and Ukraine.

In absolute terms, selling, general and administrative expenses increased $4.5 million during the three months ended September 30, 2023, compared to the same period in 2022, and as a percentage of net sales were 37.1 percent and 35.2 percent for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily related to compensation, marketing, and variable costs as a result of sales growth.

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

 

The following table summarizes our unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the three months ended September 30, 2023 and 2022 (dollar amounts in thousands):

 

			Three Months Ended September 30, 2023												Three Months Ended September 30, 2022												Change
			Total dollars						Percent of net sales						Total dollars						Percent of net sales						Total dollars						Percentage
Net sales			$	111,202					100.0		%				$	104,506					100.0		%				$	6,696					6.4		%
Cost of sales			29,964						26.9						29,632						28.4						332						1.1
Gross profit			81,238						73.1						74,874						71.6						6,364						8.5
Volume incentives			34,118						30.7						33,070						31.6						1,048						3.2
SG&A expenses			41,288						37.1						36,792						35.2						4,496						12.2
Operating income			5,832						5.2						5,012						4.8						820						16.4
Other loss, net			(927)						(0.8)						(2,281)						(2.2)						1,354						59.4
Income before income taxes			4,905						4.4						2,731						2.6						2,174						79.6
Provision for income taxes			1,763						1.6						2,531						2.4						(768)						(30.3)
Net income			$	3,142					2.8		%				$	200					0.2		%				$	2,942					1,471.0		%

The following table summarizes our unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the nine months ended September 30, 2023 and 2022 (dollar amounts in thousands):

 

			Nine Months Ended September 30, 2023												Nine Months Ended September 30, 2022												Change
			Total dollars						Percent of net sales						Total dollars						Percent of net sales						Total dollars						Percentage
Net sales			$	336,384					100.0		%				$	319,161					100.0		%				$	17,223					5.4		%
Cost of sales			93,580						27.8						93,563						29.3						17						—
Gross profit			242,804						72.2						225,598						70.7						17,206						7.6
Volume incentives			102,560						30.5						99,241						31.1						3,319						3.3
SG&A expenses			127,203						37.8						114,281						35.8						12,922						11.3
Operating income			13,041						3.9						12,076						3.8						965						8.0
Other income (loss), net			(500)						(0.1)						(3,037)						(1.0)						2,537						83.5
Income before income taxes			12,541						3.7						9,039						2.8						3,502						38.7
Provision for income taxes			5,469						1.6						10,573						3.3						(5,104)						(48.3)
Net income (loss)			$	7,072					2.1		%				$	(1,534)					(0.5)		%				$	8,606					561.0		%

 

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

The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales excluding the impact of currency fluctuations for the three months ended September 30, 2023 and 2022 (dollar amounts in thousands):