Nature’s Sunshine Products, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

CAPITAL TRANSACTIONS

CAPITAL TRANSACTIONS

12 Months Ended

Dec. 31, 2019

Share-based Payment Arrangement [Abstract]

Dividends

The declaration of dividends is subject to the discretion of our Board of Directors and will depend upon various factors, including our 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.

No dividends were declared for the years ended December 31, 2019 and 2018.

Share-Based Compensation

During the year ended December 31, 2012, our shareholders adopted and approved 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 common stock were originally authorized for the granting of awards under the 2012 Stock Incentive Plan. In January 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 the 2009 Incentive Plan, which was approved by shareholders in 2009. 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 ranging from the date of issuance 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 as reported in four of five consecutive quarters over the term of the options.

Stock option activity for 2019 and 2018 consisted of the following (share amounts in thousands, except for per share information):


	Number of Shares	Weighted-Average Exercise Price Per Share
Options outstanding at December 31, 2017	1,390	$	12.20
Granted	50	8.43
Forfeited or canceled	(227)	13.87
Exercised	(99)	6.10
Options outstanding at December 31, 2018	1,114	12.23
Granted	25	8.72
Forfeited or canceled	(797)	12.87
Exercised	(52)	4.98
Options outstanding at December 31, 2019	290	$	11.49

During the year ended December 31, 2019, we granted options to purchase 25,000 shares of common stock under the 2012 Stock Incentive Plan to one member of our Board of Directors, which are composed of time-based stock options. These options were issued with a weighted-average exercise price of $8.72 per share and a weighted-average grant date fair value of $3.44 per share. All of the options issued have an option termination date of ten years from the option grant date.

During the year ended December 31, 2018, we granted options to purchase 50,000 shares of common stock under the 2012 Stock Incentive Plan to two members of our Board of Directors, which are composed of both time-based stock options and net sales performance-based stock options. These options were issued with a weighted-average exercise price of $8.43 per share and a weighted-average grant date fair value of $3.0 to $3.5 per share. All of the options issued have an option termination date of ten years from the option grant date.

For the years ended December 31, 2019 and 2018, we issued 52,000 and 99,000 shares of common stock upon the exercise of stock options at an average exercise price of $4.98 and $6.10 per share, respectively. The aggregate intrinsic values of options exercised during the years ended December 31, 2019 and 2018 was $0.2 million and $0.2 million, respectively. For

the years ended December 31, 2019 and 2018, we recognized $0.1 million and $0.1 million of tax benefits from the exercise of stock options during the period, respectively.

The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the years ended December 31, 2019 and 2018:


	2019			2018
Weighted-average grant date fair value of grants	$	3.44		$3.0 to $3.5
Expected life (in years)	5.0			5.0
Risk-free interest rate	1.5		%	2.8	%
Expected volatility	43.2		%	38.2	%
Dividend yield	—		%	—	%

Share-based compensation expense from time-based stock options for the years ended December 31, 2019 and 2018, was $0.1 million and $0.2 million, respectively. As of December 31, 2019 and 2018, the unrecognized share-based compensation cost related to grants described above was $0, respectively. As of December 31, 2019, there are no unvested options.

The following table summarizes information about options outstanding and exercisable at December 31, 2019 (share amounts in thousands, except per share information):


	Options Outstanding						Options Exercisable
Range of Option Prices Per Share	Options Outstanding	Weighted-Avg. Remaining Contractual Life	Weighted-Avg. Exercise Price Per Share		Options Exercisable	Weighted-Avg. Remaining Contractual Life	Weighted-Avg. Exercise Price Per Share
$2.35 to $9.99	76	6.2	$	7.83	76	6.2	$	7.83
$10.00 to $13.99	189	3.9	12.32		189	3.9	12.32
$14.00 to $17.70	25	3.7	16.33		25	3.7	16.33
	290				290

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. At December 31, 2018, the aggregate intrinsic value of outstanding and exercisable options to purchase 1,114,000 shares of common stock was $0.2 million.

Restricted Stock Units

Our outstanding restricted stock units ("RSUs"), include time-based RSUs, which vest over differing periods ranging from 12 months up to 36 months from the RSU grant date, as well as performance-based RSUs, which vest upon achieving targets relating to 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 December 31, 2019 and 2018, there were 95,000 and 80,000 vested RSUs, respectively, granted to members of the Board of Directors that had a restriction period.

Restricted stock unit activity for the years ended December 31, 2019 and 2018 is as follows: (share amounts in thousands, except per share information):


	Number of Shares	Weighted-Average Grant Date Fair Value
Units outstanding at December 31, 2017	728	$	11.56
Granted	692	7.63
Issued	(257)	11.78
Forfeited	(105)	12.17
Units outstanding at December 31, 2018	1,058	8.87
Granted	333	7.23
Issued	(179)	10.21
Forfeited	(391)	9.88
Units outstanding at December 31, 2019	821	$	7.43

During the year ended December 31, 2019, we granted 333,000 RSUs of common stock under the 2012 Incentive Plan to our board, executive officers and other employees, which are composed of both time-based RSUs and share-price performance-based RSUs. The time-based RSUs were granted with a weighted-average grant date fair value $8.59 per share and vest in 12 monthly installments over a one year period from the grant date or in annual installments over three year period from the grant date. The share-price performance-based RSUs were granted with a weighted-average grant date fair value of $4.38 per share and vest upon achieving share-price targets over a three year period from the grant date.

During the year ended December 31, 2018, we granted 692,000 RSUs of common stock under the 2012 Incentive Plan to our board, executive officers and other employees, which are composed of both time-based RSUs and net sales and earnings per share performance-based RSUs. The time-based RSUs were granted with a weighted-average grant date fair value of $10.05 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 net sales and EBITDA performance-based RSUs were granted with a weighted-average grant date fair value of $11.20 per share and vest upon achieving net sales and EBITDA targets over a three year period from the grant date. The share-price performance-based RSUs were granted with a weighted-average grant date fair value of $4.73 per share and vest upon achieving share-price targets over a three year period from the grant date.

Except for share-price performance-based RSUs, RSUs are valued at the 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 13.4 percent for a common share.

Share-price performance-based RSUs were estimated using the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. Our assumptions include a performance period of three years, expected volatility of 50 percent, and a range of risk free rates between 2.1 percent and 2.9 percent.

Share-based compensation expense from RSUs for the period ended December 31, 2019 and 2018 was approximately $2.0 million and $1.9 million, respectively. As of December 31, 2019, and 2018, the unrecognized share-based compensation expense related to the grants described above was $1.1 million and $1.8 million, respectively. As of December 31, 2019, 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 years ended December 31, 2019 and 2018, was approximately $0.6 million and $0.1 million, respectively. Should we attain all of the metrics related to the performance-based RSU grant, we would recognize up to $2.0 million of potential share-based compensation expense. We currently expect to recognize an additional $0.8 million of that potential share-based compensation expense.

The number of shares issued upon vesting or exercise for restricted stock units granted, pursuant to our share-based compensation plans, is net of shares withheld to cover the minimum statutory withholding requirements that we pay on behalf of our employees, which was 36,000 and 60,000 shares for the years ended December 31, 2019 and 2018, 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.