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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-34483
NATURE’S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
| | | | | | | | |
Utah | | 87-0327982 |
(State or other jurisdiction of | | (IRS Employer |
incorporation or organization) | | Identification No.) |
2901 Bluegrass Boulevard, Suite 100
Lehi, Utah 84043
(Address of principal executive offices and zip code)
(801) 341-7900
(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 x |
| | |
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 July 24, 2020, was 19,510,764 shares.
NATURE’S SUNSHINE PRODUCTS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2020
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 and strategies. 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, 2019, but include the following:
•adverse impacts of the global COVID-19 pandemic;
•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;
•extensive government regulations to which the Company's products, business practices and manufacturing activities are subject;
•legal challenges to the Company's direct selling program or to the classification of its independent distributors;
•impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
•the Company’s ability to attract and retain independent distributors;
•the loss of one or more key independent distributors who have a significant sales network;
•the Company’s joint venture for operations in China with Fosun Industrial Co., Ltd.;
•registration of products for sale in foreign markets, or difficulty or increased cost of importing products into foreign markets;
•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;
•the effect of fluctuating foreign exchange rates;
•liabilities and obligations arising from improper activity by the Company’s independent distributors;
•failure of the Company’s independent distributors to comply with advertising laws;
•changes to the Company’s independent distributor compensation plans;
•geopolitical issues and conflicts;
•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;
•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;
•actions on trade relations by the U.S. and foreign governments;
•product liability claims;
•the sufficiency of trademarks and other intellectual property rights; and
•our cannabidiol (CBD) product line is subject to varying, rapidly changing laws, regulations, and rules.
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 disclaims 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.”
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 70,255 | | | $ | 53,629 | |
Accounts receivable, net of allowance for doubtful accounts of $423 and $407, respectively | 7,075 | | | 7,319 | |
| | | |
| | | |
Inventories | 50,166 | | | 46,666 | |
Prepaid expenses and other | 6,577 | | | 5,091 | |
Total current assets | 134,073 | | | 112,705 | |
| | | |
Property, plant and equipment, net | 56,687 | | | 59,512 | |
Operating lease right-of-use assets | 20,572 | | | 23,951 | |
Investment securities - trading | 1,035 | | | 1,150 | |
Intangible assets, net | 511 | | | 567 | |
Deferred income tax assets | 3,977 | | | 4,899 | |
Other assets | 10,074 | | | 10,284 | |
Total assets | $ | 226,929 | | | $ | 213,068 | |
| | | |
Liabilities and Shareholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 4,100 | | | $ | 4,406 | |
Accrued volume incentives and service fees | 20,172 | | | 18,893 | |
Accrued liabilities | 25,424 | | | 25,531 | |
Deferred revenue | 1,845 | | | 1,266 | |
| | | |
Related party notes payable | 1,537 | | | 1,518 | |
Income taxes payable | 2,038 | | | 1,392 | |
Current portion of operating lease liabilities | 4,416 | | | 4,941 | |
Current portion of note payable | 2,407 | | | — | |
Total current liabilities | 61,939 | | | 57,947 | |
| | | |
Liability related to unrecognized tax benefits | 1,364 | | | 1,499 | |
Long-term portion of operating lease liabilities | 17,530 | | | 20,213 | |
| | | |
Long-term note payable | 2,967 | | | — | |
Deferred compensation payable | 1,035 | | | 1,150 | |
Deferred income tax liabilities | 1,645 | | | 1,655 | |
Other liabilities | 1,214 | | | 1,168 | |
Total liabilities | 87,694 | | | 83,632 | |
| | | |
| | | |
| | | |
Shareholders’ equity: | | | |
Common stock, no par value, 50,000 shares authorized, 19,510 and 19,410 shares issued and outstanding, respectively | 136,661 | | | 135,741 | |
Retained earnings | 13,409 | | | 4,693 | |
Noncontrolling interest | 650 | | | 227 | |
Accumulated other comprehensive loss | (11,485) | | | (11,225) | |
Total shareholders’ equity | 139,235 | | | 129,436 | |
Total liabilities and shareholders’ equity | $ | 226,929 | | | $ | 213,068 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Net sales | $ | 87,286 | | | $ | 90,724 | |
Cost of sales | 23,017 | | | 23,865 | |
Gross profit | 64,269 | | | 66,859 | |
| | | |
Operating expenses: | | | |
Volume incentives | 29,165 | | | 31,302 | |
Selling, general and administrative | 28,504 | | | 31,019 | |
Operating income | 6,600 | | | 4,538 | |
Other income, net | 1,509 | | | 306 | |
Income before provision for income taxes | 8,109 | | | 4,844 | |
Provision for income taxes | 1,976 | | | 2,215 | |
Net income | 6,133 | | | 2,629 | |
Net income (loss) attributable to noncontrolling interests | 379 | | | (60) | |
Net income attributable to common shareholders | $ | 5,754 | | | $ | 2,689 | |
| | | |
Basic and diluted net income per common share: | | | |
| | | |
| | | |
| | | |
| | | |
Basic earnings per share attributable to common shareholders | $ | 0.30 | | | $ | 0.14 | |
| | | |
| | | |
| | | |
| | | |
Diluted earnings per share attributable to common shareholders | $ | 0.29 | | | $ | 0.14 | |
| | | |
Weighted average basic common shares outstanding | 19,491 | | | 19,291 | |
Weighted average diluted common shares outstanding | 19,783 | | | 19,602 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Net sales | $ | 183,212 | | | $ | 181,996 | |
Cost of sales | 47,698 | | | 47,294 | |
Gross profit | 135,514 | | | 134,702 | |
| | | |
Operating expenses: | | | |
Volume incentives | 62,183 | | | 62,315 | |
Selling, general and administrative | 59,569 | | | 64,871 | |
Operating income | 13,762 | | | 7,516 | |
Other income (loss), net | (901) | | | 258 | |
Income before provision for income taxes | 12,861 | | | 7,774 | |
Provision for income taxes | 3,722 | | | 3,416 | |
Net income | 9,139 | | | 4,358 | |
Net income (loss) attributable to noncontrolling interests | 423 | | | (88) | |
Net income attributable to common shareholders | $ | 8,716 | | | $ | 4,446 | |
| | | |
Basic and diluted net income per common share: | | | |
| | | |
| | | |
| | | |
| | | |
Basic earnings per share attributable to common shareholders | $ | 0.45 | | | $ | 0.23 | |
| | | |
| | | |
| | | |
| | | |
Diluted earnings per share attributable to common shareholders | $ | 0.44 | | | $ | 0.23 | |
| | | |
Weighted average basic common shares outstanding | 19,472 | | | 19,280 | |
Weighted average diluted common shares outstanding | 19,725 | | | 19,596 | |
| | | |
| | | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
Net income | $ | 6,133 | | | $ | 2,629 | |
Foreign currency translation loss (net of tax) | (151) | | | (530) | |
| | | |
| | | |
| | | |
Total comprehensive income | $ | 5,982 | | | $ | 2,099 | |
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Net income | $ | 9,139 | | | $ | 4,358 | |
Foreign currency translation loss (net of tax) | (260) | | | (846) | |
| | | |
| | | |
Total comprehensive income | $ | 8,879 | | | $ | 3,512 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | | | | | |
Balance at December 31, 2019 | 19,410 | | | $ | 135,741 | | | $ | 4,693 | | | $ | 227 | | | $ | (11,225) | | | $ | 129,436 | |
Share-based compensation expense | — | | | 394 | | | — | | | — | | | — | | | 394 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 60 | | | (159) | | | — | | | — | | | — | | | (159) | |
Net income | — | | | — | | | 2,962 | | | 44 | | | — | | | 3,006 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (109) | | | (109) | |
Balance at March 31, 2020 | 19,470 | | | $ | 135,976 | | | $ | 7,655 | | | $ | 271 | | | $ | (11,334) | | | $ | 132,568 | |
Share-based compensation expense | — | | | 736 | | | — | | | — | | | — | | | 736 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 40 | | | (51) | | | — | | | — | | | — | | | (51) | |
Net income | — | | | — | | | 5,754 | | | 379 | | | — | | | 6,133 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (151) | | | (151) | |
Balance at June 30, 2020 | 19,510 | | | $ | 136,661 | | | $ | 13,409 | | | $ | 650 | | | $ | (11,485) | | | $ | 139,235 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | | | | | | | | |
Balance at December 31, 2018 | 19,204 | | | $ | 133,684 | | | $ | (2,072) | | | $ | 63 | | | $ | (11,107) | | | $ | 120,568 | |
Share-based compensation expense | — | | | 230 | | | — | | | — | | | — | | | 230 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 69 | | | (189) | | | — | | | — | | | — | | | (189) | |
Net income (loss) | — | | | — | | | 1,757 | | | (28) | | | — | | | 1,729 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (316) | | | (316) | |
Balance at March 31, 2019 | 19,273 | | | $ | 133,725 | | | $ | (315) | | | $ | 35 | | | $ | (11,423) | | | $ | 122,022 | |
Share-based compensation expense | — | | | 621 | | | — | | | — | | | — | | | 621 | |
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax | 29 | | | (4) | | | — | | | — | | | — | | | (4) | |
Net income (loss) | — | | | — | | | 2,689 | | | (60) | | | — | | | 2,629 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (530) | | | (530) | |
Balance at June 30, 2019 | 19,302 | | | $ | 134,342 | | | $ | 2,374 | | | $ | (25) | | | $ | (11,953) | | | $ | 124,738 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 9,139 | | | $ | 4,358 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Provision for doubtful accounts | 17 | | | 30 | |
Depreciation and amortization | 5,070 | | | 4,987 | |
Non-cash lease expense | 2,257 | | | 2,792 | |
Share-based compensation expense | 1,130 | | | 851 | |
| | | |
Loss on sale of property, plant and equipment | 6 | | | 3 | |
Deferred income taxes | 912 | | | 365 | |
Purchase of trading investment securities | (35) | | | (57) | |
Proceeds from sale of trading investment securities | 146 | | | 105 | |
Realized and unrealized losses (gains) on investments | 4 | | | (173) | |
Foreign exchange losses (gains) | 996 | | | (205) | |
| | | |
Changes in assets and liabilities: | | | |
Accounts receivable | 173 | | | (1,035) | |
Inventories | (4,114) | | | (2,052) | |
Prepaid expenses and other current assets | (1,523) | | | (259) | |
Other assets | (69) | | | (767) | |
Accounts payable | (138) | | | (1,226) | |
Accrued volume incentives and service fees | 1,523 | | | (235) | |
Accrued liabilities | 59 | | | (6,203) | |
Deferred revenue | 582 | | | 1,039 | |
Lease liabilities | (2,072) | | | (2,340) | |
Income taxes payable | 607 | | | (1,207) | |
Liability related to unrecognized tax benefits | (135) | | | (40) | |
Deferred compensation payable | (115) | | | 125 | |
Net cash provided by (used in) operating activities | 14,420 | | | (1,144) | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (2,210) | | | (2,774) | |
| | | |
| | | |
| | | |
Net cash used in investing activities | (2,210) | | | (2,774) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | | |
Principal payments of revolving credit facility | — | | | (547) | |
Proceeds from revolving credit facility | — | | | 547 | |
Proceeds from note payable | 5,374 | | | — | |
| | | |
| | | |
Tax benefit from stock awards | (210) | | | (193) | |
| | | |
Net cash provided by (used in) financing activities | 5,164 | | | (193) | |
Effect of exchange rates on cash and cash equivalents | (748) | | | (186) | |
Net increase (decrease) in cash and cash equivalents | 16,626 | | | (4,297) | |
Cash and cash equivalents at the beginning of the period | 53,629 | | | 50,638 | |
Cash and cash equivalents at the end of the period | $ | 70,255 | | | $ | 46,341 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | |
Cash paid for income taxes, net of refunds | $ | 2,143 | | | $ | 3,895 | |
Cash paid for interest | 3 | | | 63 | |
See accompanying notes to condensed consolidated financial statements.
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
We are a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products to a sales force of independent distributors who uses the products themselves or resells them to consumers.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 June 30, 2020, and for the three and six-month periods ended June 30, 2020 and 2019. 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, 2020.
It is suggested that these condensed consolidated financial statements 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, 2019.
Use of Estimates
The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States (“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 due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors 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 Manager and Distributor 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
Noncontrolling interests changed as a result of the net income attributable to noncontrolling interests of $0.4 million and $0.4 million for the three and six months ended June 30, 2020, respectively. Net losses attributable to the noncontrolling interests were $0.1 million and $0.1 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2020 and December 31, 2019, noncontrolling interests were $0.7 million and $0.2 million, respectively.
Restructuring Related Accruals and Expenses
We recorded $0 and $0.1 million of restructuring related expenses during the three and six months ended June 30, 2020, respectively. We recorded $0.4 million and $0.2 million restructuring related expenses during the three and six months ended June 30, 2019. Accrued severance and restructuring related costs were $10,000 and $0.4 million as of June 30, 2020 and December 31, 2019, respectively.
Recent Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820 based on the consideration of costs and benefits to promote the appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of this ASU did not have a significant impact on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. The amendments in this update are effective for reporting periods beginning after December 15, 2020, with early adoption permitted. The adoption of this ASU is not expected to have a significant impact on our Consolidated Financial Statements.
(2) Inventories
The composition of inventories is as follows (dollar amounts in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Raw materials | $ | 14,697 | | | $ | 13,329 | |
Work in progress | 1,288 | | | 1,426 | |
Finished goods | 34,181 | | | 31,911 | |
Total inventories | $ | 50,166 | | | $ | 46,666 | |
(3) Investment Securities - Trading
Our trading securities portfolio totaled $1.0 million at June 30, 2020, and $1.2 million at December 31, 2019, and generated gains of $93,000 and $40,000 for the three months ended June 30, 2020 and 2019, respectively, and losses of $4,000 and gains of $173,000 for the six months ended June 30, 2020 and 2019, respectively.
(4) Revolving Credit Facility and Other Obligations
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 11, 2020 the credit agreement was amended to extend the term to mature on July 1, 2023. The amendment also allows for additional borrowings of $15.0 million or up to three separate increases of no less than $5.0 million each. We pay interest on any borrowings under the Credit Agreement, which through June 10, 2020, was at LIBOR plus 1.25 percent (3.05 percent as of December 31, 2019), and an annual commitment fee of 0.2 percent on the unused portion of the commitment. Interest under the amended Credit Agreement is at LIBOR, or the Index floor of 0.75 percent, plus 2.25 percent (3.00 percent as of June 30, 2020), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. We are required to settle our net borrowings under the Credit Agreement only upon maturity, and as a result, have classified prior outstanding borrowings as non-current on our condensed consolidated balance sheet. At June 30, 2020, 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 balance, inventory balance and other assets. As of June 30, 2020, 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, that matures sixty months from the Base Date, which must not be later than April 30, 2021 (the "Capital Credit Agreement"). We pay interest on any borrowings under the Capital Credit Agreement at the Indicative Index
plus 2.75 percent (3.50 percent as of June 30, 2020). We are required to settle our borrowings under the Capital Credit Agreement in sixty monthly payments, each equal to 1.82 percent of the loan amount. The Capital Credit Agreement is collateralized by any new equipment purchased under the agreement. As of June 30, 2020, there was no outstanding balance under the Capital Credit Agreement.
On April 14, 2020, we obtained a loan (the “Loan”) from Bank of America, B.A. in the amount of $5.4 million under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The PPP is a loan designed to provide an incentive for qualifying businesses to maintain their employees on the payroll despite significant economic uncertainty. We applied to receive the Loan based on the significant economic uncertainty facing the Company in the U.S. and globally.
The Loan matures on April 14, 2022 and bears interest at a rate of 1.00 percent per annum, payable monthly commencing on November 15, 2020. We may prepay the Loan at any time prior to maturity with no prepayment penalties. The principal amount of the Loan and accrued interest are eligible for forgiveness after either eight weeks or 26 weeks if we use the Loan proceeds for qualifying expenses, including payroll, rent, and utilities during the eight week period commencing on the date the Loan has been advanced. The amount of the Loan eligible for forgiveness will be reduced to the extent that we have (i) terminated full-time employees during the period commencing February 15, 2020 and ending April 26, 2020 and (ii) reduced salaries (beyond a statutorily prescribed threshold) during the eight week period commencing on the date the Loan has been advanced. We will be obligated to repay any portion of the principal amount of the Note that is not forgiven, together with accrued interest thereon at the rate set forth above until such unforgiven portion is paid in full. As of June 30, 2020, there was $5.4 million outstanding under the PPP, $2.4 million of which was classified as current.
.(5) Net Income Per Share
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 six months ended June 30, 2020 and 2019 (dollar and share amounts in thousands, except for per share information):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to common shareholders | $ | 5,754 | | | $ | 2,689 | | | $ | 8,716 | | | $ | 4,446 | |
| | | | | | | |
Basic weighted average shares outstanding | 19,491 | | | 19,291 | | | 19,472 | | | 19,280 | |
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Basic earnings per share attributable to common shareholders | $ | 0.30 | | | $ | 0.14 | | | $ | 0.45 | | | $ | 0.23 | |
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Diluted shares outstanding: | | | | | | | |
Basic weighted-average shares outstanding | 19,491 | | | 19,291 | | | 19,472 | | | 19,280 | |
Stock-based awards | 292 | | | 311 | | | 253 | | | 316 | |
Diluted weighted-average shares outstanding | 19,783 | | | 19,602 | | | 19,725 | | | 19,596 | |
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Diluted earnings per share attributable to common shareholders | $ | 0.29 | | | $ | 0.14 | | | $ | 0.44 | | | $ | 0.23 | |
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Dilutive shares excluded from diluted-per-share amounts: | | | | | | | |
Stock options | 844 | | | 445 | | | 844 | | | 445 | |
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Anti-dilutive shares excluded from diluted-per-share amounts: | | | | | | | |
Stock options | 264 | | | 838 | | | 239 | | | 862 | |
Potentially dilutive shares excluded from diluted-per-share amounts include performance-based options to purchase shares of common stock for which certain earnings 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.
(6) Capital Transactions
Share-Based Compensation
During the year ended December 31, 2012, our shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan (the “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. The number of shares available for awards, as well as the terms of outstanding awards, are subject to adjustment as provided in the 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.
We also maintain a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided 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. Under the 2012 Incentive Plan, any shares subject to award, or awards forfeited or reacquired by the Company issued under the 2009 Incentive Plan are available for award up to a maximum of 400,000 shares.
Stock Options
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 six-month period ended June 30, 2020, is as follows (amounts in thousands, except per share information):
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| Number of Shares | | Weighted Average Exercise Price Per Share |
Options outstanding at December 31, 2019 | 290 | | | $ | 11.49 | |
Granted | — | | | — | |
Forfeited or canceled | — | | | — | |
Exercised | (25) | | | 5.79 | |
Options outstanding at June 30, 2020 | 265 | | | 12.03 | |
There was no share-based compensation expense for the three- and six-month periods ended June 30, 2020 and 2019 for stock options. As of June 30, 2020 and December 31, 2019, there was no unrecognized share-based compensation expense related to the grants described above.
At June 30, 2020, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 265,000 shares of common stock was $11,000. At December 31, 2019, the aggregate intrinsic value of outstanding and exercisable options to purchase 290,000 shares of common stock was $0.1 million.
For the six-month periods ended June 30, 2020 and 2019, we issued 25,000 and 1,000 shares of common stock upon the exercise of stock options at an average exercise price of $5.79 and $2.35 per share, respectively. The aggregate intrinsic value of options exercised during the six-month periods ended June 30, 2020 and 2019, was $0.1 million and $10,000, respectively.
For the six-month periods ended June 30, 2020 and 2019, the Company recognized $48,000 and $3,000 of tax benefits from the exercise of stock options, respectively.
As of June 30, 2020 and December 31, 2019, we did not have any unvested performance-based stock options outstanding.
Restricted Stock Units
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 revenue and earnings growth, earnings-per-share, 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 June 30, 2020 and December 31, 2019, there were 100,000 and 95,000 vested RSUs, respectively, granted to the Board of Directors with a restriction period.
Restricted stock unit activity for the six-month period ended June 30, 2020, is as follows (amounts in thousands, except per share information):
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| Number of Shares | | Weighted Average Grant Date Fair Value |
Restricted Stock Units outstanding at December 31, 2019 | 821 | | | $ | 7.43 | |
Granted | 686 | | | 5.77 | |
Forfeited | (2) | | | 8.68 | |
Issued | (114) | | | 9.74 | |
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