NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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 consultants who uses the products themselves or resells them to consumers.
We market our products in Austria, Belarus, Canada, China, Colombia, the Czech Republic, Denmark, the Dominican Republic, Ecuador, El Salvador, Finland, Germany, Guatemala, Honduras, Hong Kong, Iceland, Indonesia, Ireland, Italy, Japan, Kazakhstan, Latvia, Lithuania, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, Norway, Panama, Poland, Russia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Taiwan, Thailand, Ukraine and the United States. We also market our products though a wholesale model to Australia, Brazil, Chile, Israel, New Zealand, Norway, Peru and the United Kingdom.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and transactions of the Company and our subsidiaries. At December 31, 2022 and 2021, substantially all of our subsidiaries were wholly owned. Intercompany balances and transactions have been eliminated in consolidation. We consolidate the joint ventures in Hong Kong and China in our consolidated financial statements, with another party’s interest presented as a noncontrolling interest. Additionally, we operate a limited number of markets in jurisdictions where local laws require the formation of a partnership with an entity domiciled in that market. These partners have no rights to participate in the sharing of revenues, profits, losses or distribution of assets upon liquidation of these partnerships.
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 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.
Cash and Cash Equivalents
We consider all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Substantially all of our cash deposits either exceed the United States federally insured limit or are located in countries that do not have government insured accounts or are subject to tax withholdings when repatriating earnings.
Accounts Receivable
Accounts receivable consist principally of receivables from credit card companies, arising from the sale of products to our independent consultants, and receivables from independent consultants in foreign markets. Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. However, due to the geographic dispersion of credit card and independent consultant receivables, the collection risk is not considered to be significant. Substantially all of the receivables from credit card companies were current as of December 31, 2022 and 2021. We maintain an allowance for potential credit losses that is based primarily on the aging category, historical trends and management’s evaluation of the financial condition of account holder. This reserve is adjusted periodically as information about specific accounts becomes available.
Restricted Investment Securities
We have certain restricted investment securities classified as trading securities. We maintain our trading securities portfolio to generate returns that are offset by corresponding changes in certain liabilities related to our deferred compensation plans (see Note 10). The trading securities portfolio consists of marketable securities, which are recorded at fair value and are included in long-term restricted investment securities on the consolidated balance sheets because they remain our assets until they are actually paid out to the participants. These investment securities are not available to us to fund operations as they are restricted for the payment of the deferred compensation payable. We have established a rabbi trust to finance obligations under the plan. Both realized and unrealized gains and losses on trading securities are included in interest and other income.
Fair Value of Financial Instruments
Our financial instruments, consisting primarily of cash and cash equivalents, accounts receivable, investments, 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 years ended December 31, 2022, and 2021, we did not have any write-offs related to the remeasurement of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
Inventories
Inventories are adjusted to lower of cost and net realizable value, using the first-in, first-out method. The components of inventory cost include raw materials, labor and overhead. To estimate any necessary adjustments, various assumptions are made in regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning and market conditions. If future demand and market conditions are less favorable than management’s assumptions, additional inventory adjustments could be required.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives for buildings range from 20 to 50 years; building improvements range from 7 to 10 years; machinery and equipment range from 2 to 10 years; computer software and hardware range from 3 to 10 years; and furniture and fixtures range from 2 to 5 years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets. Maintenance and repairs are expensed as incurred and major improvements are capitalized.
Other Assets
Other assets include lease deposits, deposits with third-party service providers, intangible assets, and deposits to operate in certain markets.
Impairment of Long-Lived Assets
We review our long-lived assets, such as property, plant and equipment and intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If an impairment indicator existed, we would use an estimate of future undiscounted net cash flows of the related assets or groups of assets over their remaining lives in measuring whether the assets were recoverable. An impairment loss would be calculated by determining the difference between the carrying values and the fair values of these assets.
Incentive Trip Accrual
We accrue for expenses associated with our direct sales program, which rewards independent consultants with paid attendance for incentive trips, including our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could generate liabilities more or less than the amounts recorded. We have accrued convention and meeting costs of $5.8 million and $6.7 million at December 31, 2022, and 2021, respectively, which are included in accrued liabilities in the consolidated balance sheets.
Foreign Currency Translation
The local currency of the foreign subsidiaries is used as the functional currency, except for our operations served by a U.S. based subsidiary (for example, Russia and Ukraine). The financial statements of foreign subsidiaries where the local currency is the functional currency are translated into U.S. dollars using exchange rates in effect at year end for assets and liabilities and average exchange rates during each year for the results of operations. Adjustments resulting from translation of financial statements are reflected in accumulated other comprehensive loss, net of income taxes. Foreign currency transaction gains and losses are included in other income (expense) in the consolidated statements of operations.
The functional currency in highly inflationary economies is the U.S. dollar and transactions denominated in the local currency are re-measured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments, which are included in the consolidated statements of operations. A country is considered to have a highly inflationary economy if it has a cumulative inflation rate of approximately 100 percent or more over a three-year period as well as other qualitative factors including historical inflation rate trends (increasing and decreasing), the capital intensiveness of the operation, and other pertinent economic factors. During the years ended December 31, 2022 and 2021, we did not operate in any countries considered to be highly inflationary.
Revenue 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 the point in time in which the customer obtains control of the products, per the agreed shipping terms in the respective market. Revenue recognition is discussed in further detail in Note 2.
Advertising Costs
Advertising costs are expensed as incurred and classified in selling, general and administrative expenses. Advertising expense incurred for the years ended December 31, 2022 and 2021, totaled approximately $11.0 million and $8.2 million, respectively. The increase in advertising costs is due to our calculated effort to build brand awareness.
Research and Development
All research and development costs are expensed as incurred and classified in selling, general and administrative expense. Total research and development expenses were approximately $1.5 million and $1.4 million for the years ended December 31, 2022 and 2021, respectively.
Contingencies
We are involved in certain legal proceedings. When a loss is considered probable in connection with litigation or non-income tax contingencies and when such loss can be reasonably estimated, we record our best estimate within a range related to the contingency. If there is no best estimate, we record the minimum of the range. As additional information becomes available, we assess the liability related to the contingency and revise the estimates. Revisions in estimates of the liabilities could materially affect our results of operations in the period of adjustment. Our contingencies are discussed in further detail in Note 11.
Income Taxes
Our income tax expense includes amounts related to the United States and many foreign jurisdictions and is comprised of current year income taxes payable, changes in our deferred tax assets and liabilities and contingent reserves.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. Deferred tax assets are offset by a valuation allowance if it is believed to be more likely than not that some portion of the deferred tax asset will not be fully realized. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
Net Income Per Common 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.
The following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all years (dollar and share amounts in thousands, except for per share information): | | | | | | | | | | | |
| 2022 | | 2021 |
Net income (loss) attributable to common shareholders: | | | |
| | | |
| | | |
Net income (loss) | $ | (390) | | | $ | 28,853 | |
| | | |
Basic weighted-average shares outstanding | 19,326 | | | 19,858 | |
| | | |
Basic earnings (loss) per share attributable to common shareholders: | | | |
| | | |
| | | |
Net income (loss) | $ | (0.02) | | | $ | 1.45 | |
| | | |
Diluted Shares Outstanding: | | | |
Basic weighted-average shares outstanding | 19,326 | | | 19,858 | |
Share-based awards | — | | | 469 | |
Diluted weighted-average shares outstanding | 19,326 | | | 20,327 | |
| | | |
Diluted earnings (loss) per share attributable to common shareholders: | | | |
| | | |
| | | |
Net income (loss) | $ | (0.02) | | | $ | 1.42 | |
| | | |
Potentially dilutive shares excluded from diluted-per-share amounts: | | | |
Share-based awards | — | | | 425 | |
| | | |
Potentially anti-dilutive shares excluded from diluted-per-share amounts: | | | |
Share-based awards | 1,234 | | (1) | — | |
___________________________
(1) As a result of the net loss for year ended December 31, 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 year ended December 31, 2022 include 143 outstanding options to purchase shares of common stock and 1,091 restricted stock units.
For the years ended December 31, 2022 and 2021, potentially dilutive shares excluded from diluted-per-share amounts include performance-based restricted stock units (“RSU”), 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 years presented.
Share-Based Compensation
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.
Our outstanding 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 EBITDA growth, and/or stock price levels. RSUs granted to the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting.
We recognize all share-based payments to Directors and employees, including grants of stock options and RSUs, in the statement of operations based on their grant-date fair values. We record compensation expense over the vesting period of the stock options and RSUs based on the fair value of the stock options and RSUs on the date of grant.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in shareholders’ equity except those resulting from investments by, and distributions to, shareholders. Accordingly, our comprehensive income (loss) includes net income and foreign currency adjustments that arise from the translation of the financial statements of our foreign subsidiaries.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update are elective and subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This could affect balances of right of use assets, lease liabilities, and notes payables. The amendments in this update are effective as of March 12, 2020 through December 21, 2022. The adoption of this ASU is not expected to have a significant impact on our Consolidated Financial Statements.
NOTE 2: REVENUE 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 the point in time in which the customer obtains control of the products, per the agreed shipping terms in the respective market. The majority of our contracts have a single performance obligation and are short term in nature. Contracts with multiple performance obligations are insignificant. Amounts received for unshipped merchandise are recorded as deferred revenue. 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. 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. Sales returns for the years ended December 31, 2022 and 2021, were $1.4 million and $1.1 million, respectively.
Amounts billed to customers for shipping and handling are reported as a component of net sales. Shipping and handling revenues of approximately $1.2 million and $1.7 million were reported as net sales for the years ended December 31, 2022 and 2021, respectively. The decrease is primarily due to promotions designed to drive growth in our North America segment.
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 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. Payments for sales incentives and rebates are calculated monthly based upon qualifying sales.
Taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between us and our customers, including sales, use, value-added, and some excise taxes, are presented on a net basis (excluded from net sales).
Disaggregation of Revenue
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 12, Segment Information, for further information on our reportable segments and our presentation of disaggregated revenue by reportable segment and product category.
Practical Expedients and Exemptions
We have made the accounting policy election to treat shipping and handling as a fulfillment activity rather than a promised service under Topic 606.
NOTE 3: INVENTORIES
The composition of inventories is as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Raw materials | | $ | 23,133 | | | $ | 22,494 | |
Work in process | | 1,713 | | | 1,746 | |
Finished goods | | 43,103 | | | 36,612 | |
Total inventory | | $ | 67,949 | | | $ | 60,852 | |
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment is as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Land and improvements | | $ | 668 | | | $ | 351 | |
Buildings and improvements | | 32,055 | | | 32,845 | |
Machinery and equipment | | 31,577 | | | 30,631 | |
Furniture and fixtures | | 11,669 | | | 12,237 | |
Computer software and hardware | | 61,180 | | | 57,535 | |
| | 137,149 | | | 133,599 | |
Accumulated depreciation and amortization | | (90,987) | | | (82,742) | |
Total property, plant and equipment | | $ | 46,162 | | | $ | 50,857 | |
Depreciation expense was $11.0 million and $11.1 million for the years ended December 31, 2022 and 2021, respectively.
Capitalized interest was immaterial for the years ended December 31, 2022 and 2021.
NOTE 5: INVESTMENT SECURITIES
Our trading securities portfolio totaled $0.7 million and $1.0 million at December 31, 2022 and 2021, respectively, and generated losses of $0.2 million and gains of $0.1 million, for the years ended December 31, 2022 and 2021, respectively.
NOTE 6: ACCRUED LIABILITIES
The composition of accrued liabilities is as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Salaries and employee benefits | | $ | 7,786 | | | $ | 15,025 | |
Sales, use and property tax (See Note 11) | | 2,754 | | | 3,169 | |
Convention and meeting costs | | 5,787 | | | 6,682 | |
| | | | |
Other | | 9,264 | | | 6,724 | |
Total | | $ | 25,591 | | | $ | 31,600 | |
NOTE 7: 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 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 (5.87 percent as of December 31, 2022), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. At 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. We were in compliance with the debt covenants set forth in the Credit Agreement as of December 31, 2022.
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 do not expect to make any additional borrowings under the Capital Credit Agreement. 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 December 31, 2022, there was $1.2 million outstanding balance under the Capital Credit Agreement, $1.2 million of which was classified as current.
Future maturities of long-term debt at December 31, 2022 (dollar amounts in thousands): | | | | | | | | |
Year Ending December 31, | | |
2023 | | $ | 1,174 | |
| | |
| | |
| | |
| | |
Thereafter | | — | |
Total | | $ | 1,174 | |
NOTE 8: INCOME TAXES
Income from continuing operations before provision (benefit) for income taxes are taxed under the following jurisdictions (dollar amounts in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Domestic | | $ | (7,505) | | | $ | 14,932 | |
Foreign | | 22,720 | | | 16,890 | |
Total | | $ | 15,215 | | | $ | 31,822 | |
Components of the provision (benefit) for income taxes for each of the two years in the period ended December 31, 2022 are as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Current: | | | | |
Federal | | $ | 2 | | | $ | — | |
State | | (48) | | | 54 | |
Foreign | | 6,725 | | | 5,690 | |
Subtotal | | 6,679 | | | 5,744 | |
Deferred: | | | | |
Federal | | 5,792 | | | (5,679) | |
State | | (13) | | | 146 | |
Foreign | | 2,207 | | | 1,404 | |
Subtotal | | 7,986 | | | (4,129) | |
Total provision (benefit) for income taxes | | $ | 14,665 | | | $ | 1,615 | |
The provision (benefit) for income taxes, as a percentage of income from continuing operations before provision (benefit) for income taxes, differs from the statutory U.S. federal income tax rate due to the following: | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Statutory U.S. federal income tax rate | | 21.0 | % | | 21.0 | % |
State income taxes, net of U.S. federal income tax benefit | | (0.5) | | | 0.4 | |
U.S. tax impact of foreign operations | | (8.6) | | | (6.3) | |
Valuation allowance change | | 64.3 | | | (19.7) | |
Unrecognized tax benefits | | 1.4 | | | 0.5 | |
| | | | |
Permanent foreign items | | 4.3 | | | 2.4 | |
Withholding tax on royalties | | 4.2 | | | 3.4 | |
Executive compensation | | 2.7 | | | 4.9 | |
Stock compensation | | (2.4) | | | (4.0) | |
Tax return to provision differences | | (3.4) | | | 0.4 | |
Income eliminated in consolidation | | 13.1 | | | 1.7 | |
Other | | 0.3 | | | 0.4 | |
Effective income tax rate | | 96.4 | % | | 5.1 | % |
Adjustments relating to the U.S. impact of foreign operations decreased the effective tax rate by 8.6 percentage points and 6.3 percentage points in 2022 and 2021, respectively. The components of this calculation were: | | | | | | | | | | | | | | |
Components of U.S. tax impact of foreign operations | | 2022 | | 2021 |
| | | | |
Foreign tax credits | | (19.4) | % | | (7.4) | % |
Foreign tax rate differentials | | 1.5 | | | 0.6 | |
Foreign withholding taxes | | 2.6 | | | 1.9 | |
Transfer pricing adjustment | | 1.2 | | | 0.6 | |
Impact of Subpart F | | 1.8 | | | — | |
Impact of GILTI | | 3.7 | | | 0.7 | |
Impact of FDII | | — | | | (2.7) | |
| | | | |
Total | | (8.6) | % | | (6.3) | % |
The significant components of the deferred tax assets (liabilities) are as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Inventory | | $ | 1,612 | | | $ | 1,173 | |
Accrued liabilities | | 2,859 | | | 2,364 | |
Operating lease liabilities | | 2,667 | | | 2,871 | |
Deferred compensation | | 160 | | | 228 | |
Share-based compensation | | 797 | | | 877 | |
Intangible assets | | 115 | | | 131 | |
Bad debts | | 9 | | | 30 | |
Net operating losses | | 5,060 | | | 4,861 | |
Foreign tax and withholding credits | | 15,392 | | | 14,116 | |
| | | | |
Accrued compensation | | 304 | | | 1,726 | |
| | | | |
Other deferred tax assets | | 1,960 | | | 2,160 | |
| | | | |
Valuation allowance | | (18,049) | | | (8,650) | |
Total deferred tax assets | | 12,886 | | | 21,887 | |
| | | | |
Accelerated depreciation | | (4,029) | | | (5,171) | |
Right of use assets | | (2,365) | | | (2,544) | |
Tax on unremitted earnings | | (1,032) | | | (2,107) | |
Other deferred tax liabilities | | (40) | | | (41) | |
Total deferred tax liabilities | | (7,466) | | | (9,863) | |
Total deferred taxes, net | | $ | 5,420 | | | $ | 12,024 | |
The components of deferred tax assets (liabilities), net are as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Net deferred tax assets | | $ | 6,859 | | | $ | 13,590 | |
Net deferred tax liabilities | | (1,439) | | | (1,566) | |
Total deferred taxes, net | | $ | 5,420 | | | $ | 12,024 | |
We have elected the period cost method (costs are treated as a current period expense when incurred) under U.S. GAAP as it relates to GILTI income inclusions in U.S. taxable income. Each reporting period we analyze our indefinite reinvestment assertions with respect to undistributed foreign earnings. As of December 31, 2022, we continue to assert that we do not intend to reinvest undistributed foreign earnings indefinitely in our foreign subsidiaries.
We have provided a valuation allowance of $18.0 million and $8.7 million as of December 31, 2022 and 2021, respectively, for certain deferred tax assets, including foreign net operating losses, for which we cannot conclude it is more likely than not that they will be realized. We reviewed our tax positions and increased the valuation allowance by approximately $9.4 million in 2022 primarily due to a domestic increase of $7.5 million and a foreign increase of $1.9 million. For financial reporting purposes, the increase in valuation allowances increases income tax expenses in the year recorded. At December 31, 2022, we had approximately $15.4 million of foreign tax and withholding credits. Of the $15.4 million credits, $15.0 million are foreign tax credits, most of which expire in 2024 and a majority of which are offset by a valuation allowance.
At December 31, 2022, foreign subsidiaries had unused operating loss carryovers for tax purposes of approximately $5.1 million, tax effected. The net operating losses will expire at various dates from 2023 through 2034, with the exception of those in some foreign jurisdictions where there is no expiration. The foreign net operating losses have a valuation allowance recorded against the portion expected to expire before utilization.
We are subject to regular audits by federal, state and foreign tax authorities. These audits may result in additional tax liabilities. We believe we have appropriately provided for income taxes for all years. Several factors drive the calculation of our tax reserves. Some of these factors include: (i) the expiration of various statutes of limitations; (ii) changes in tax law and regulations; (iii) the issuance of tax rulings; and (iv) settlements with tax authorities. Changes in any of these factors may result in adjustments to our reserves, which would impact our reported financial results.
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 that have open tax years from 2017 through 2021.
The total outstanding balance for liabilities related to unrecognized tax benefits at December 31, 2022 and 2021 was $0.2 million and $0, respectively, all of which would favorably impact the rate if recognized. Included in these amounts is approximately $0.1 million and $0, respectively, of combined interest and penalties. We increased interest and penalties approximately $0.1 million for the year ended December 31, 2022 and decreased interest and penalties approximately $36,000 for the year ended December 31, 2021. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision.
During the years ended December 31, 2022 and 2021, we added approximately $0.2 million and $0, respectively to our liability for unrecognized tax benefits. In addition, we recorded a benefit related to the lapse of applicable statute of limitations of approximately $0 and $0.1 million for the years ended December 31, 2022 and 2021, respectively, all of which favorably impacted our effective tax rate.
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax benefits, excluding interest and penalties, is as follows for the years (dollar amounts in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Unrecognized tax benefits, opening balance | | $ | — | | | $ | 56 | |
Settlement of liability reclassified as income tax payable | | — | | | — | |
Payments on liability | | (5) | | | (175) | |
Tax positions taken in a prior period | | | | |
Gross increases | | 120 | | | 412 | |
Gross decreases | | — | | | (237) | |
Tax positions taken in the current period | | | | |
Gross increases | | — | | | — | |
Gross decreases | | — | | | — | |
Lapse of applicable statute of limitations | | — | | | (52) | |
Currency translation adjustments | | (5) | | | (4) | |
Unrecognized tax benefits, ending balance | | $ | 110 | | | $ | — | |
We do not anticipate a significant change to liabilities related to unrecognized tax benefits within the next twelve months and do not have any unrecognized tax benefits that, if recognized, would affect the effective tax rate.
Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which it has 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.
NOTE 9: CAPITAL TRANSACTIONS
Dividends
No dividends were declared for the year ended December 31, 2022.
On March 10, 2021, we announced a special non-recurring cash dividend of $1.00 per common share in an aggregate amount of $19.9 million that was paid on April 5, 2021, to shareholders of record on March 29, 2021. In accordance with the provisions of our 2012 Stock Incentive Plan (the “2012 Incentive Plan”), as a result of the special dividend we are required to make the participant’s original grant whole by preventing either dilution or enlargement of the benefits or potential benefits intended by the original grant. The 2012 Incentive Plan provides our Compensation Committee with the discretion to meet this requirement. See further discussion in the Share-Based Compensation section of this Note.
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.
Share Repurchase Program
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 shares. The repurchases may be made from time to time as market conditions warrant and are subject to regulatory considerations. For the year ended December 31, 2022, we repurchased 909,000 shares of our common stock for $13.6 million. At December 31, 2022, the remaining balance available for repurchases under the program was $24.0 million.
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 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 2012 Incentive Plan for stock splits, stock dividends, recapitalizations and other similar events.
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.
Stock option activity for 2022 and 2021 consisted of the following (share amounts in thousands, except for per share information): | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Grant Date Fair Value |
Options outstanding at January 1, 2021 | 226 | | | $ | 12.10 | | | |
Granted | — | | | — | | | $ | — | |
Forfeited or canceled | — | | | — | | | — | |
Exercised | (54) | | | 12.00 | | | 6.61 | |
Options outstanding at December 31, 2021 | 172 | | | 12.13 | | | 5.05 | |
Granted | — | | | — | | | — | |
Forfeited or canceled | — | | | — | | | — | |
Exercised | (29) | | | 9.17 | | | 3.92 | |
Options outstanding at December 31, 2022 | 143 | | | $ | 12.72 | | | $ | 5.28 | |
Share-based compensation expense from stock options for the years ended December 31, 2022 and 2021, was $0, respectively. As of December 31, 2022 and 2021, the unrecognized share-based compensation cost related to grants described above was $0, respectively. As of December 31, 2022 and 2021, we had no unvested options outstanding.
For the years ended December 31, 2022 and 2021, we issued 29,000 and 54,000 shares of common stock upon the exercise of stock options at an average exercise price of $9.17 and $12.00 per share, respectively. The aggregate intrinsic values of options exercised during the years ended December 31, 2022 and 2021 was $0.3 million and $0.4 million, respectively. For the years ended December 31, 2022 and 2021, we recognized $0.1 million and $0.2 million of tax benefits from the exercise of stock options during the period, respectively.
At December 31, 2022, the aggregate intrinsic value of outstanding and exercisable options to purchase 143,000 shares of common stock was $0. At December 31, 2021, the aggregate intrinsic value of outstanding and exercisable options to purchase 172,000 shares of common stock was $1.1 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 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 December 31, 2022 and 2021, there were 94,000 and 88,000 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, 2022 and 2021 is as follows: (share amounts in thousands, except per share information): | | | | | | | | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Units outstanding at January 1, 2021 | 1,179 | | | $ | 6.18 | |
Granted | 364 | | | 13.74 | |
Issued | (573) | | | 6.35 | |
Forfeited | (140) | | | 5.72 | |
Units outstanding at December 31, 2021 | 830 | | | 9.46 | |
Granted | 881 | | | 10.30 | |
Issued | (331) | | | 7.56 | |
Forfeited | (289) | | | 9.27 | |
Units outstanding at December 31, 2022 | 1,091 | | | $ | 10.76 | |
During the year ended December 31, 2022, we granted 881,000 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 $10.76 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 $6.01 per share and vest upon achieving share-price targets over a three year period from the grant date.
During the year ended December 31, 2021, we granted 364,000 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 of $18.05 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 share-price performance-based RSUs were granted with a weighted-average grant date fair value of $14.14 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 12.2 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 50.1 percent, and a risk free rate of 3.3 percent.
Share-based compensation expense related to time-based RSUs for the period ended December 31, 2022 and 2021 was approximately $1.9 million and $2.1 million, respectively. As of December 31, 2022, and 2021, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $3.0 million and $1.6 million, respectively. As of December 31, 2022, the remaining compensation expense is expected to be recognized over the weighted-average period of approximately 1.6 years.
Share-based compensation expense related to performance-based RSUs for the years ended December 31, 2022 and 2021, was approximately $1.0 million and $1.5 million, respectively. Should we attain all of the metrics related to the
performance-based RSU grant, we would recognize up to $5.3 million of potential share-based compensation expense. We currently expect to recognize an additional $2.5 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 81,000 and 165,000 shares for the years ended December 31, 2022 and 2021, 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.
NOTE 10: EMPLOYEE BENEFIT PLANS
Deferred Compensation Plans
We sponsor a qualified deferred compensation plan which qualifies under Section 401(k) of the Internal Revenue Code. During 2022, we made matching contributions of 70.0 percent of employee contributions up to a maximum of 5.0 percent of the employee’s compensation. Our contributions to the plan vest after a period of three years. During 2022 and 2021, we contributed to the plan $1.0 million and $0.9 million, respectively.
We provide a nonqualified deferred compensation plan for our officers and certain key employees. Under this plan, participants may defer up to 100 percent of their annual salary and bonus. Although participants direct the investment of these funds, they are classified as trading securities and are included in long-term investment securities on the consolidated balance sheets because they remain our assets until they are actually paid out to the participants. We have established a trust to finance obligations under the plan. At the end of each year and at other times provided under the plan, we adjust our obligation to a participant by the investment return or loss on the funds selected by the participant under rules established in the plan. Upon separation of employment of the participant with the Company, the obligation owed to the participant under the plan will be paid as a lump sum or over a period of either three or five years (and will continue to be adjusted by the applicable investment return or loss during the period of pay-out). We had deferred compensation plan assets of approximately $0.7 million and $1.0 million as of December 31, 2022, and 2021, respectively. The change in the liability associated with the deferred compensation plan is recorded in the deferred compensation payable.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Contractual Obligations
We have entered into long-term agreements with third-parties in the ordinary course of business, in which we have agreed to pay a percentage of net sales in certain regions in which we operate, or royalties on certain products. In 2022 and 2021, the aggregate amounts of these payments were $12,000 and $26,000, respectively.
Legal Proceedings
We are party to various legal proceedings. Management cannot predict the ultimate outcome of these proceedings, 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, no assurances can be given that such insurance will continue to be available at an acceptable cost to us, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.
Non-Income Tax Contingencies
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 December 31, 2022 and 2021, accrued liabilities include $0.3 million and $0.2 million related to non-income tax contingencies, respectively. While we believe that the assumptions and estimates used to determine this liability 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..
Other Litigation
We are party to various other legal proceedings in the United States and several foreign jurisdictions related to value-added tax assessments and other civil litigation. We have accrued $0.6 million related to the estimated outcome of these proceedings as of December 31, 2022. In addition, we are party to other litigation where there is a reasonable possibility that a loss may be incurred, 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. During the years ended December 31, 2022 and 2021, we made payments of $0 and $6,000, respectively, related to the settlement of litigation.
Self-Insurance Liabilities
Similar to other manufacturers and distributors of products that are ingested, we face an inherent risk of exposure to product liability claims in the event that, among other things, the use of our products results in injury. During 2017, we secured product liability coverage to cover possible claims. Such insurance may not be sufficient to cover one or more large claims, or the insurer may successfully disclaim coverage as to a pending or future claim. As a result, there can be no assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on our business prospects, financial position, results of operations or cash flows. Subsequent to obtaining the product liability coverage, we have recorded a reserve which is an estimate of potential costs.
We self-insure for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.
We review our self-insurance accruals on a quarterly basis and determine, based upon a review of our recent claims history and other factors, which portions of our self-insurance accruals should be considered short-term and long-term. We have accrued $1.1 million and $0.7 million for product liability and employee medical claims at December 31, 2022 and 2021, respectively, of which $0.8 million and $0.4 million was classified as short-term. Such amounts are included in accrued liabilities and other long-term liabilities on our consolidated balance sheets.
Government Regulations
We are subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to our direct selling system. We are also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either us or our independent consultants are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on our operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on us and our operations. Although we believe that we are in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which we operate, no assurance can be given that our compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on our financial position, results of operations or cash flows.
NOTE 12: OPERATING BUSINESS SEGMENT AND INTERNATIONAL OPERATION INFORMATION
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. Each of 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.
Reportable business segment information for the years ended December 31, 2022 and 2021 is as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Net sales: | | | | |
Asia | | $ | 186,292 | | | $ | 176,860 | |
Europe | | 78,991 | | | 91,539 | |
North America | | 133,214 | | | 149,746 | |
Latin America and Other | | 23,413 | | | 25,939 | |
Total net sales | | 421,910 | | | 444,084 | |
Contribution margin (1): | | | | |
Asia | | 85,876 | | | 89,939 | |
Europe | | 25,911 | | | 30,959 | |
North America | | 47,615 | | | 56,922 | |
Latin America and Other | | 9,981 | | | 10,953 | |
Total contribution margin | | 169,383 | | | 188,773 | |
| | | | |
Selling, general and administrative (2) | | 153,125 | | | 154,103 | |
Operating income | | 16,258 | | | 34,670 | |
| | | | |
Other loss, net | | (1,043) | | | (2,848) | |
Income before provision for income taxes | | $ | 15,215 | | | $ | 31,822 | |
___________________________
(1) Contribution margin consists of net sales less cost of sales and volume incentives expense.
(2) Service fees in China totaled $14.9 million and $18.7 million for the years ended December 31, 2022 and 2021, respectively. These service fees are included in our selling, general and administrative expenses.
| | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Capital expenditures: | | | | |
Asia | | $ | 1,830 | | | $ | 1,081 | |
Europe | | 57 | | | 142 | |
North America | | 5,573 | | | 5,371 | |
Latin America and Other | | 168 | | | 72 | |
Total capital expenditures | | $ | 7,628 | | | $ | 6,666 | |
| | | | |
Depreciation and amortization: | | | | |
Asia | | $ | 1,856 | | | $ | 1,825 | |
Europe | | 123 | | | 64 | |
North America | | 8,863 | | | 9,206 | |
Latin America and Other | | 183 | | | 67 | |
Total depreciation and amortization | | $ | 11,025 | | | $ | 11,162 | |
| | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Assets: | | | | |
Asia | | $ | 95,362 | | | $ | 104,659 | |
Europe | | 15,773 | | | 15,486 | |
North America | | 112,319 | | | 131,207 | |
Latin America and Other | | 6,324 | | | 7,522 | |
Total assets | | $ | 229,778 | | | $ | 258,874 | |
From an individual country/region perspective, only the United States, South Korea and Taiwan comprise 10 percent or more of consolidated net sales for the years ended December 31, 2022 and 2021 as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Net sales: | | | | |
United States | | $ | 122,863 | | | $ | 138,174 | |
South Korea | | 54,935 | | | 61,107 | |
Taiwan | | 48,474 | | | 23,198 | |
Other | | 195,638 | | | 221,605 | |
Total net sales | | $ | 421,910 | | | $ | 444,084 | |
Revenue generated by each of our product lines is set forth below (dollars in thousands): | | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Asia: | | | | |
General health | | $ | 53,603 | | | $ | 50,044 | |
Immunity | | 3,283 | | | 1,599 | |
Cardiovascular | | 55,312 | | | 48,019 | |
Digestive | | 37,457 | | | 36,069 | |
Personal care | | 9,205 | | | 17,765 | |
Weight management | | 27,432 | | | 23,364 | |
| | 186,292 | | | 176,860 | |
Europe: | | | | |
General health | | $ | 34,438 | | | $ | 40,045 | |
Immunity | | 8,489 | | | 8,957 | |
Cardiovascular | | 9,380 | | | 11,787 | |
Digestive | | 20,024 | | | 23,142 | |
Personal care | | 4,854 | | | 5,149 | |
Weight management | | 1,806 | | | 2,459 | |
| | 78,991 | | | 91,539 | |
North America: | | | | |
General health | | $ | 64,488 | | | $ | 65,379 | |
Immunity | | 14,966 | | | 19,563 | |
Cardiovascular | | 14,383 | | | 16,219 | |
Digestive | | 28,490 | | | 37,130 | |
Personal care | | 6,212 | | | 7,579 | |
Weight management | | 4,675 | | | 3,876 | |
| | 133,214 | | | 149,746 | |
Latin America and Other: | | | | |
General health | | $ | 6,728 | | | $ | 7,532 | |
Immunity | | 2,901 | | | 2,667 | |
Cardiovascular | | 1,662 | | | 2,001 | |
Digestive | | 10,040 | | | 10,291 | |
Personal care | | 1,399 | | | 2,573 | |
Weight management | | 683 | | | 875 | |
| | 23,413 | | | 25,939 | |
Total net sales | | $ | 421,910 | | | $ | 444,084 | |
From an individual country perspective, only the United States comprise 10 percent or more of consolidated property, plant and equipment as follows (dollar amounts in thousands): | | | | | | | | | | | | | | |
As of December 31 | | 2022 | | 2021 |
Property, plant and equipment, net | | | | |
United States | | $ | 42,389 | | | $ | 46,595 | |
Other | | 3,773 | | | 4,262 | |
Total property, plant and equipment | | $ | 46,162 | | | $ | 50,857 | |
NOTE 13: RELATED PARTY TRANSACTIONS
Our joint venture in China, owned 80 percent by us and 20 percent by a wholly owned subsidiary of Fosun Pharma, borrowed $0 from the Company during the years ended December 31, 2022 and 2021. At December 31, 2022 and 2021 our joint venture in China held a note payable to the Company of $0 and $1.2 million, respectively. Our joint venture in China borrowed $0 from our joint venture partner, during the years ended December 31, 2022 and 2021. At December 31, 2022 and 2021, our joint venture in China held a note payable to our joint venture partner of $0 and $0.3 million, respectively. These
notes are payable in one year and bear interest of 3.0 percent. The note between the joint venture and the Company eliminates in consolidation. In March 2022, the outstanding principal and interest amounts were repaid.
NOTE 14: FAIR VALUE
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 assets measured at fair value on a recurring basis as of December 31, 2022 (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 |
Restricted investment securities - trading | $ | 702 | | | $ | — | | | $ | — | | | $ | 702 | |
Total assets measured at fair value on a recurring basis | $ | 702 | | | $ | — | | | $ | — | | | $ | 702 | |
The following table presents our hierarchy for assets measured at fair value on a recurring basis as of December 31, 2021 (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 |
Restricted investment securities - trading | $ | 964 | | | $ | — | | | $ | — | | | $ | 964 | |
Total assets measured at fair value on a recurring basis | $ | 964 | | | $ | — | | | $ | — | | | $ | 964 | |
Restricted investment securities - trading — Our trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
For the years ended December 31, 2022 and 2021, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).
During the years ended December 31, 2022 and 2021, we did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.
NOTE 15: LEASES
We lease certain retail stores, warehouses, distribution centers, office spaces and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, we account for lease components including rent, real estate taxes and insurance costs separately from non-lease components, like common-area maintenance fees. Most of our leases include one or more options to renew, with renewal terms that can extend the lease term for one or more years. The exercise of the lease option to renew is solely at our discretion.
Operating lease costs were approximately $5.3 million and $6.1 million for the years ended December 31, 2022 and 2021, respectively. Short-term lease costs were approximately $1.2 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively. Operating lease costs were offset by sublease income of $0 and $34,000 for the years ended December 31, 2022 and 2021, respectively. Short-term lease costs represent our costs with respect to leases with a duration of 12 months or less and are not reflected on our Consolidated Balance Sheets.
Information related to the Company’s operating right-of-use assets and related operating lease liabilities were as follows (dollar amounts in thousands, except lease term and discount rate): | | | | | | | | | | | | | | |
As of December 31, | | 2022 | | 2021 |
Assets: | | | | |
Operating lease right-of-use assets | | $ | 16,145 | | | $ | 18,349 | |
| | | | |
Liabilities: | | | | |
Current | | 4,266 | | | 4,350 | |
Long-term | | 13,745 | | | 15,919 | |
Total operating lease liabilities | | $ | 18,011 | | | $ | 20,269 | |
| | | | | | | | | | | | | | |
Weighted-average remaining lease term | | 5.0 | | 5.7 |
Weighted-average discount rate | | 3.91 | % | | 4.00 | % |
| | | | | | | | | | | | | | |
Year Ended December 31, | | 2022 | | 2021 |
Cash paid for operating lease liabilities | | $ | 5,579 | | | $ | 6,257 | |
Right-of-use assets obtained in exchange for new operating lease obligations | | 3,181 | | | 3,961 | |
Cancellations or adjustments of leases that resulted in the reduction of lease assets in exchange for lease liabilities | | $ | (216) | | | $ | (63) | |
There were no material operating leases that we have entered into and that were yet to commence as of December 31, 2022.
The approximate aggregate commitments under non-cancelable operating leases in effect at December 31, 2022, were as follows (dollar amounts in thousands): | | | | | |
Year Ending December 31, | |
2023 | $ | 4,936 | |
2024 | 4,544 | |
2025 | 3,100 | |
2026 | 2,588 | |
2027 | 2,180 | |
Thereafter | 2,584 | |
Total lease payments | $ | 19,932 | |
Less: Imputed interest (1) | 1,921 | |
Present value of lease liabilities | $ | 18,011 | |
(1) Calculated using our corporate borrowing rate based on the term of each lease ranging from 3.00 percent to 4.29 percent.
NOTE 16: SUBSEQUENT EVENTS
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 expect to record a one-time pre-tax charge of up to $4.8 million in the first quarter of 2023 as a result of this event. 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. While this matter will result in additional near-term expenses, we do not expect this incident to otherwise have a material impact on our business.