Nature's Sunshine Products, Inc. (NATR) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Nature's Sunshine Products First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Strulson, General Counsel and Chief Compliance Officer of Nature's Sunshine Products. Thank you, Mr. Strulson. You may begin.

Thank you. Good afternoon everyone and thanks all of you for joining our conference call to discuss our first quarter 2015 financial results. This call is available for replay and a live webcast that we posted on our Web site at www.naturessunshine.com in the Investor's section. With us today are Greg Probert, Chairman and CEO; and Steve Bunker, Executive Vice President, CFO and Treasurer. Additionally Dr. Matt Tripp is here and will be available for questions. The press release which was issued this afternoon at approximately 4:00 p.m. Eastern Time and the information on this call contains certain forward-looking statements, which are based on a number of assumptions that are subject to change and involve known and unknown risks, uncertainties or other factors which may not be under the company's control. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will, and other similar expressions. Forward-looking statements are not guarantees of future performance and the actual results, performance or achievement of the company may be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, but are not limited to those factors disclosed in the company's Annual Report on Form 10-K, under the caption Risk Factors and other reports filed with the Securities and Exchange Commission. The press release and the information on this call speak only as of today's date and the company disclaims any duty to update the information provided herein and therein. I will now turn the call over to Greg Probert, Chairman and CEO of Nature's Sunshine Products.

Thanks, Rich, and good afternoon everyone. In the first quarter of 2015, we experienced sustained local currency growth in NSP Americas and Synergy Worldwide, which were offset by the negative impacts of the strong dollar and continuing sales challenges in NSP Russia, Central and Eastern Europe. We furthered our progress in China making strides in our go-to-market strategy through our joint venture with Fosun Pharma. Today, I will update you on our business segments and key growth initiatives, which are aimed at transforming Nature's Sunshine into a multi-brand, multi-channel organization and driving distributor adoption, leadership and engagement across the globe. But first, let me begin with some key sales highlights for this year. First quarter net sales of $83.9 million or down 6.6% on a local currency basis, currency declined in NSP Russia, Central and Eastern Europe eclipse our continued strength in Synergy and NSP North America. Excluding the declines in NSP Russia, Central and Eastern Europe, year-over-year first quarter revenue growth would have been 1.7% on a local currency basis. Subsequent to quarter-end, we announced a plan to streamline our operations and focus our resources on profitable growth opportunities. We expect this planned streamline to improve the efficiencies and reduce cost resulting in significant annualized improvements to our operating income. Steve will walk you through the associated expenses and expect to annualize cost savings as a result of these actions in greater detail shortly. Turning first to Synergy Worldwide business unit, which represents 34% of our total company sales. We continue to see sustained momentum in Synergy following last year's global summit. Synergy's first quarter sales of $28.8 million increased by 3.6% year-over-year in local currencies. Growth was led by our key markets of Japan and Europe and was partially offset by declines in North America. In Japan, net sales growth exceeded 10% year-over-year in local currency, a consolidation of NSP Japan and Synergy Japan was fully reflecting our results for both the first quarter of 2015 and the prior year period making year-over-year comparisons more meaningful going forward. Therefore, we are particularly encouraged by the regions performance and our ability to maintain a large percentage of our NSP customers and distributors through the transition. Growth in the quarter was further supported by combination of new products coupled with reinvigorated distributor leadership. Now turning to Synergy Europe, the first quarter marked the third consecutive quarter of year-over-year growth. Synergy Europe's revenues increased 9.1% in local currencies versus the first quarter of 2014. We experienced growth in all key markets in Europe, which continues to be supported by investments we made in sales and marketing resources in the second half of 2014. Sales further benefited from the Slim Smart Health Shake and E9 Energy Drink product launches at the European Summit in Barcelona at the end of September. The introduction of Slim Smart was very well received in Scandinavia in particular and helped to drive growth through new customer acquisition. We will continue to focus on Slim Smart to drive distributor and customer acquisition throughout the region. Net sales in South Korea increased by 1% in local currency, our rated growth has slowed over the prior year quarter stemming from new Internet advertising restrictions on sites that were previously used to successfully recruit distributors and customers in the region last year. To address this, we are taking steps to improve both current programs as well as launch new programs to provide the affected distributors with tools to drive recruiting. In regards to the rest of Asia, Indonesia delivered triple-digit sales growth in the quarter increasing 120% year-over-year in local currency driven by new distributor leadership as well as the reengagement of existing leaders in the region. Further, we exited the Vietnam market as part of our [crazy] [ph] announced plans to streamline our operations. Annual sales in this market totaled less than $2 million or 0.3% consolidated net sales in the first quarter of 2015. Net sales in Synergy North America continued to be depressed declining 15.6% year-over-year primarily as a result of a reduction in distributor recruiting. To address this, we have been implementing various growth initiatives in North America to more effectively support distributor recruiting, training and motivation. Turning to our NSP America business; our largest business segment representing 55% of our total company sales. First quarter net sales of $46.5 million increased by 2.4% year-over-year in local currencies led by continued strength in the U.S. market. NSP U.S. posted its third consecutive quarter of year-over-year growth of 4.5% as we continue to see our new sales program gains traction. We have seen increased adoption at both the in-form sales method, which is focused on building a data app, a health and weight management and our retail sales teams. During the first quarter we have certified 801 IN.FORM coaches and increased nearly 10% from the fourth quarter of 2014 with 227 groups currently up and running. Further contributing to sales growth in NSP U.S. has been last year's relaunch of our silver immune product which include silver shield, our strongest SKU in the immune product category. We also reduced the new products last month at our National Convention Anaheim, California including Berberine IR, a glucose metabolism support supplement, CardioxLDL, a patent pending cholesterol metabolism support supplement, new and improved Co-Q10 supplement for cardiovascular support and a relaunch of our line of 100% authentic essential oils. In Latin America, net sales declined 5.4% year-over-year in local currencies to $8.3 million. Sales in NSP Latin America continued to be challenged mainly due to the challenging regulations for product registration. We are working hard to approximately address this by transitioning our sales promotion to adopt the in-form business method and at the same time ensuring that our resources are in-line with this initiative. We look forward to keeping you updated on our progress on this front in coming quarters. Turning now to NSP Russia, Central and Eastern Europe, net sales of $7.4 million represent 9% of total company sales and decreased 51% over the prior year. Ongoing political unrest and conflict coupled with further devaluation of the Russian ruble and the Ukrainian hryvnia significantly impacted our first quarter performance. As a result we experienced considerable net sales decline in Ukraine and Russia and to a lesser extent in other markets across the region. With regard to the currency devaluation our product pricing in the region is pecked to the U.S. dollar and the local currency decline resulted in a sharp increase in the local cost of our products. Rough history of instability, we have been focusing our efforts on the retention and engagement of our distributors and customers in the region and continue to show support through additional price promotions and training. We have also introduced some new product kit inline with our daily habit of health including our digestive system kit, a daily nutrition kit and a healthy scalable strength kit that all has been well received by the deal. We will continue to stay the course and remain confident that we are well-positioned to reach and through our strong partnership with our local partner. Nevertheless, where conditions changing constantly we do not – we have not enabled to offset the decline and do not expect net sales declines reserve in the near term. The situation remains highly unpredictable and we expect the sales will continue to be adversely impacted in the near term. Turning now to China and new markets; first quarter net sales revenue for this segment which currently only includes our export business decreased 42.8% year-over-year to $1.2 million and represents approximately 1.4% of total company sales. The decrease in net sales was primarily due to the transition of NSP U.K., which was a direct selling market in the first quarter 2014 to an export market in 2015. Currently, there are no managers or distributors in the China and new market segment. In regards to China, our entry into the region through a joint venture with Fosun Pharma remains on track. We are continuing towards deploying the first phase of our operating plan in China in late 2015 with a launch of our ecommerce channel in order to offer Nature's Sunshine branded products online. In 2016, we are expected to launch retail channel as well as receive our direct selling license for the region and subsequently launch our direct selling business. During the quarter, we made significant progress towards our direct selling license submission as well as finalizing our product offerings in the retail direct selling and ecommerce channels. Further, under the leadership of Paul Noack, our new President of China and new markets we continue to make several key new hires identify products for registration and negotiate long-term office space. Expansion in China is a key part of our vision to transform Nature's Sunshine into multi-brand, multi-channel organization and to further drive distributor adoption leadership and engagement on a global scale. We look forward to updating you on our progress on this initiative in the coming quarters. Before I wrap up remarks today, I want to highlight the grand opening of the Hughes Center for Research and Innovation. Our new multi-million dollar R&D center and medical clinic in our corporate headquarters at the end of February. Equipped with state of the art instrumentation, the 5400 square foot center allows our team of award winning scientist and doctors to lead development of effective herbal and nutritional products by setting supplement interactions at a molecular level. As part of our mission, the Hughes Center has been designed to discover solutions that help to combat mega health trends through the most effective natural nutritionally therapeutic products available. We also continue to invest in our information technology systems during the quarter, which includes Oracle ERP implementation project, provide us with a single integrated software solution to unify our global infrastructure. We recently reviewed our Oracle ERP project and developed enhanced implementation plan. The revised plan results in a delay of go-live until January 2017 allows us to parallel track several significant improvements that [recruitment will see] [ph] not included in the plan. The upgraded solution allows us to reengineer a new commission engine before go-live to replace our current aging legacy commission engines saving costs. In addition, we are placing greater emphasis on completion of the Oracle distributor analytic business intelligent tools allowing us to better understand our distributors operating pattern and provide them with better business tools. The enhanced plan allows us to go-live with the fully integrated business solution which revises with greater ability to respond more rapidly and proactively to our distributors needs. Lastly, we continue our track record by turning to our capital shareholders with the Board approved $0.10 per share regular quarterly cash dividend. Our regular and special dividends together with our share repurchase program underscores the confidence our Board and management team have in our strategy and our ability to continue to execute on our strategic growth initiatives while returning capital to shareholders. In summary, despite the headwinds we experienced in certain markets namely NSP Russia, Central and Eastern Europe, Synergy North America and NSP Latin America; we have been making great strides on our strategic growth initiatives to transform Nature's Sunshine into a multi-brand, multi-channel organization. Overall, new program and product development continue to deliver improved traction, leadership and engagement among our distributor base. We remain encouraged by our progress to-date as well as our efforts to streamline our operation to position ourselves for profitable growth longer term. With that, I will turn the call over to Steve to review our first quarter financials.

Thanks, Greg, and good afternoon everyone. Net sales in the quarter were $83.9 million down 10.3% from $93.5 million in the same quarter last year. On a local currency basis net sales decreased 6.6% year-over-year. As Greg mentioned earlier, local currency net sales revenue growth within Synergy and NSP Americas for the first quarter of 2015 was offset by declines within NSP Russia, Central and Eastern Europe, excluding these declines, net sales for the remaining business segments would have increased by 1.7% year-over-year in local currency. Cost of sales was $21.9 million, down slightly from $22.6 million in the year-ago period. Cost of sales increased as a percentage of net sales in the first quarter of 2015 by 1.9% to 26.1% as compared to the same period in the prior year. The increase is primarily due to the devalution of the foreign currencies relative to the U.S. dollar as well as unfavorable net changes in inventory reserves year-over-year. Gross margin fell 190 basis points to 73.9% compared to 76.8% in the year ago period, primarily as a result of the decline in revenue and the increased cost of sales percentage during the first quarter. Volume incentives accounted for 36.2% of net sales in the first quarter down just over 1% compared to 37.3% of net sales in the same period last year. The decline was primarily due to decreased sales in NSP Russia, Central and Eastern Europe, which pay higher volume incentives than our global average. As a reminder, volume incentives are a significant part of our network marketing program and are designed to provide incentive to reach higher product sales levels. Volume incentive varies slightly on a percentage basis by product due to pricing policies and commission plans in place and by the sales mix in our various markets. Selling, general and administrative expenses were $26.3 million, down $2.8 million or 9.7% compared to $29.2 million in the same period a year ago. Selling, general and administrative expenses as a percent of net sales were relatively flat with the prior period of just over 31%. The decrease in SG&A was primarily related to reduce management service cost in NSP Russia, Central and Eastern Europe, due to lower net sales; reduced U.S. healthcare and other benefit costs as well as $0.6 million of non-recurring expenses associated with the transition of NSP Peru and NSP United Kingdom to export markets in 2014. The reduction in SG&A expenses was partially offset by $0.8 million of increased investment in China. Operating income decreased 22.1% to $5.3 million or 6.4% of net sales from $6.8 million or 7.3% of net sales in the prior year period. The decrease was primarily due to the net sales revenue decline in addition to an increase in cost of sales as a percentage of net sales as previously noted. Adjusted EBITDA as defined in our earnings press release is net income from continuing operations before taxes, depreciation, amortization and other income adjusted to exclude share-based compensation expense decreased 16.4% to $7.7 million in the first quarter as compared to $9.2 million in the first quarter of 2014. The effective income tax rate for the first quarter of 2015 was 16.1% compared to a benefit of 55.6% in the first quarter of 2014. The current quarter's effective tax rate was lower than the U.S. federal statutory tax rate of 35% which was primarily attributable to the partial utilization of foreign tax credit benefits related to inter-company dividends paid by foreign subsidiaries to the U.S. Corporation in prior years. Net income from continuing operations for the quarter was $4.2 million, or $0.22 per diluted share as compared to $10.2 million or $0.61 per diluted share in the year ago period. In addition, we received proceeds to $1.3 million or $0.07 per diluted common share from the sale of our fixed assets in Venezuela which we exited in November 2014. The proceeds were included in our results as discontinued operations. As Greg highlighted earlier just last month we announced the plan to streamline our operations and refocus our activities on profitable growth opportunities. The plan streamlining is expected to reduce costs, improve the efficiencies and renewed focus on larger and more profitable company markets. As part of this plan we are exiting the Vietnam market and we will eliminate approximately 100 to 130 positions worldwide through both severance and attrition in which we will incur one-time expenses of approximately $3.9 million. The vast majority of these costs will be incurred in the second quarter of 2015 and will include approximately $3.1 million of employee severance costs and $7 million related to the closure of Vietnam and $0.1 million in other related costs. As a result of this action, we currently expect to realize annualized savings of approximately $10 million to $15 million from lower operating and employment costs. Moving to the balance sheet, cash and cash equivalents as of March 31, 2015 were $50.1 million, down from $58.7 million at December 31, 2014. The lower cash balance primarily reflects cash outflows of $1.9 million to pay dividends, $2.9 million to repurchase shares of common stock and $4.1 million to reinvest in our Oracle ERP implementation. Inventory levels at March 31 were up 3.7% from December 31, 2014 levels and we have approximately $117 million in current assets. As Greg described earlier, our Board of Directors approved a regular quarterly cash dividend of $0.10 per share payable on June 2 to shareholders of record as of the close of business on May 22. We also repurchased 0.2 million shares of common stock during the quarter under our 20 million share repurchase program for approximately $2.9 million. At March 31, 2015, the remaining balance available for repurchases under the program was $17.1 million. We remain pleased with our overall financial position and expect to continue to use excess cash to fund our growth activities and recurrent value to our shareholders. With that, I will turn the call over to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Gregg Hillman with First Wilshire Security Management. Please proceed with your question.

Greg, can you talk about distributor count in NSP North America, I think you give the figure for whole thing, but to keep this active managers or active distributors in NSP North America, has that changed – and the trend, what was going on there?

Yes. So it was in our press release Gregg, so it was – basically flat on – the active managers were 7700, distributors were 141,200 versus last quarter – last year's Q1 same number of active managers that was flat and 145,600 active distributors and customers.

Is that was that trending up from the prior quarter?

Gregg, it's really hard to hear you.

We have figure trending up from the prior quarter – the fourth quarter of 2014?

First, couple of things were happening in there Gregg is, on our retail side of the business, as you know, a lot of times they historically have signed up people as members and customers given the discount and what we are seeing is a trend towards a lot of retailers selling at full retail and so that would affect the member count, even though it wouldn't affect the revenue – it was actually an increase in revenue year-over-year for our member count would be different. So you are seeing the trend on member count and distributor count trending counter to the revenue.

And then speaking of backlog your efforts, marketing efforts could help the retailers, can you talk about that a little bit, how you actually maybe hired marketing people and how that effort is going?

Right. So Adriana who runs that has done a lot of segmentation over the past year or so in terms of really identifying our 800 – more than 800 retailers and as put in regional sales people around the U.S. to actually visit and to what we would call key account management. So that's one of the thing, just being more active in visiting our retailers, we are also providing them with better PoPs and we have in the back. So it's early, I think attacking from a retail standpoint and also from a key account management standpoint, both of those things are having a good effect. And the accounts where we have reached out to the accounts, we are seeing an up tick in those versus the ones we have in the office. So we will continue to invest in that initiative, and I think we just actually hired one more regional sales person in that – in the retail side of the business, so we can get more reach and frequency across our accounts.

Okay. That's helpful. And then finally, just the IN.FORM program, is that working in all geographies, the IN.FORM program or variation of it.

Yes. We launched in the U.S. and I gave you some of the step of that very effective. We lost a launch in Canada and we are seeing similar effect and then we are just now starting to roll it out in Latin America. But basically, the second market out which is Scandinavia, it behaved very, very similar to what we saw in the U.S. So we are very – I think optimistic as we seen to roll it out in Latin America and migrate our business over to the IN.FORM sales model, we can review some of that negative trend in Latin America.

And then can you just finally, can you just give me an update on Angie's List is that still continue to build momentum or what's going on there?

On Angie's List?

Yes.

It continues to be one of our top five products. I think one of our top recruiting products as a very high over 70% repurchase rate. It's being used both as a strong retail resell product and also I think a lot our distributors are using as a recruiting tool for both new distributors and new customers because the story is Gregg is obviously a patent pending product which is unique to us. You can't get anywhere else. And I think it's a great story and it's a great product when you take it. You feel the effects and all those things combine had made it really one of our best selling products and it continues to be.

Okay. Thanks very much.

Thanks Gregg.

Thank you. [Operator Instructions] Our next question comes from the line of Nelson Obus with Wynnefield Capital. Please proceed with your question.

Yes. Hi, there. Let me just get a little sense to start, when you look at say Vietnam as a case study, what didn't – what conditions were in place in Vietnam, when their country is close by that had triple-digit comparison, is it regulatory issues mostly when we run into that variation?

Yes. I think that's exactly right. Nelson, we are not just proved to be very tough country at the business end and a lot of that is a regulatory. So we had similar leadership that we had in the rest of the region and some of the same sales, so looking back, as they get nicely back to – we are in a market that currently condones or supports direct selling. And I think our decision Nelson was really one of – let's make sure that we are penetrating the markets where we have growth and feel that fire and as we went we are – and rationalize our cost structure and as Steve said drove millions of dollars to improve profitability and our EPS. You want to make sure that we were feeding the things that are working. So the China launch, the U.S. NSP business Synergy Japan, Indonesia, Energy Europe those are all experienced significantly – significant growth and I think our strategy is – let's penetrate those markets deeper and try to continue headwinds in a market like Vietnam.

So what we appear to have here is, ratio here is kind of interesting, if you want to $4 million to say to realize annual savings of approximately $12 million, I mean that's a four month pay back which is conceivable on the under one circumstance which is that, I assume you are getting out to some areas that you are losing money in. I mean is that a fair assumption? And on the other hand there is say mid-point 115 reduction in force, I think your total employment is 900 people, so maybe you could just put some color into that – that is a very short four months – maybe just put a little color on what the April initiative means in spite of –

It's a great question and one that we obviously gave a lot of thought to. I wouldn't call this a cost cutting exercise, I would call a strategic repositioning of our investment in growth initiatives, which is a fancy way of saying we didn't just go across and get out of markets, as a matter of fact, the only market that we got out of was Vietnam. So what we did do is, we look – how do we streamline operations, how do we drive work out of the system that's not driving revenue or profits, refocus. So to give you, one example, we looked at health and sport strategy in South America. We looked at our manufacturing strategies; we looked at what's really moving the needle and the company and making sure that we don't cut there. So we didn't cut in the U.S. and I speak it is growing actually or hiring there. We didn't cut back in China because that's one of our key growth initiatives. We didn't cut back in Japan. So looked at some of the portfolio of countries that we have and just I think got very aggressive at reengineering the way we do business. And that's throughout the organization, was at a country level, it was in sales, it was in accounting, it was in legal, it was up here in manufacturing, distribution. And this was a project that took a lot of manpower, a lot of focus with my entire senior management team. We did it in a very quick amount of time. And frankly I think the pay back – it's a great pay back period. But, I think more importantly by pushing out some of the work in the system, it allows the entire company to focus on the three of four key things that are really going to deliver growth.

I mean did you keep Russia, Central and Eastern Europe basically in tact or I mean or did that receive its portion or greater portion of the cut?

If you remember Nelson, we have a third-party partner there.

Sure.

So our fee structure is a variable fee structure, so as revenues goes up and down, we basically automatically adjust our SG&A. So that model has proven very beneficial in this really tough time in Russia, but in terms of our staff here, Brian Yates is still overseeing. He is actually in – he is in Russia this week. And our position with our distributors and one of our top Russian distributor is coming in a couple of week to meet with me. Our position is even though it's tough, we have stabilized the market and even though there is obviously risk there that we can't predict the geopolitical as well as currency issues. We are staying in the market, we are supporting our distributors. We are being creative on how we do that? I think I mentioned how we created that kitting program to take our products and put them into systems which has proven very beneficial to our distributors and allowed them to have a different type of story to tell to the consumer. And so all-in-all, we are staying in force with local partner thing of course as well.

Yes. Okay. So this is a pretty extreme reset man, you did do it rather quickly, just, I mean, did you bring in an outside consultant or so in-house that you focused?

No, no. We didn't have they formed a committee of some of senior executives to do it. And yes, it was quick, it was about six week process and then broad approval and we executed the strategy over the past 30 days. My thing was when you do something like this, it is a pretty drastic reset. I think it's certainly the right thing to do – protect profitable growth -- refocused on some of the new high growth area. And my belief is that we get through them quickly and refocus on the growth opportunities in the company.

Let me just ask one other question that as to do with other continuing expense programs that were obviously going to last a little longer. The IT program just to get a little sense of this because again you refocused that, I guess my biggest question is, are we implementing something that is quite unique, I mean when you assess the outcome because now you have done a sort of a reset within the IT effort which – we are still going to stretch if I'm doing my math right, in another 20 months. What – I guess its two parts to that, one is, are we breaking new ground or is it pretty clear when you work with Oracle what you are going to be left with, they are not doing something here that's never been done before. And why is it take so – why is it, why exactly does it take so long, I mean the fact that it's taking so long, don't tell me that maybe there is some very custom work being done here that requires time maybe you could just reflect on that for a minute?

Nelson that's a great question, and I think a project of this magnitude when you are putting a – doing an implementation over 40 countries, it does take some time. And but, as we really review it that the project and what made sense, it made a lot of sense to pull some things forward that we get a parallel track and as a result of that slow that ERP implementation some focus on pulling forward the distributor metrics and back module some of the business interruption part of the ERP project such that we can better understand our distributors operating patterns. We could provide them with some better tools to grow there – to build there businesses as well as the fact that we have a couple of legacy commission systems and so it allowed us to pull forward the reengineering of our commission engines and implement that at the same time. And so on an overall basis that it really makes a lot of sense, it's an upgraded solution rather than do some of these projects after the ERP is implemented, we can do amount of parallel track and have some of the things that provide the most benefit sooner and some additional cost savings at a faster pace.

But this isn't really [indiscernible], I mean this is – you pretty much know what you are going to wind up, it's just how long it takes you to get there, right? I mean –

Yes. That's correct.

Look my last question, just in terms of just trying to deconstruct this, when you talk about the reduction, the SG&A expense is partially offset by $800,000 increased investment in China. Now, is that off a base, I mean what did you anticipate, you will wind up expanding for example, when you gave us the whole IT effort, I think you out $35 million to $40 million in terms of what you thought you would expense before you finished it. Is there a similar calculation that you are in a position to make them regard to China in terms of when that would become breakeven?

Nelson, we – one thing we did is, and I will, we don't give a lot of guidance here, but I will talk a little bit about the fact that we set-up joint venture where we own 80%, our partner Fosun Pharmaceutical owns 20% of that joint venture. That joint venture was funded with $20 million, $16 million from us and $4 million from them. And –

And that was capitalized, right? That was capitalized, correct?

Well, it's just funded, some of it – it will be expense, this $800,000 that we incurred in this first quarter, is expense that comes out of that $20 million of funding.

That's what I'm trying to get my hands around.

Yes. So the fact that we will spend a significant amount of money over the last year and over the next year or year-and-a-half as we move to putting the ecommerce in place, the retail in place and the direct selling businesses and channels in place.

And will that be – you have a nice habit of expensing which I kind of like rather than capitalizing. But, is it clear how much of that $16 million will be capitalized versus expense at this point?

Not entirely clear, but I would expect that there will be more expense than capital.

Okay. I think that's the conservatism.

There is some capital as you enter into your office space and build out your office computers, those kind of things and there maybe some capital as we move forward with some of the licenses. But, there would be also some expense and probably the larger part expense.

So just remind me, is this the first expense draw down from the $16 million or whether – I probably should be following this because --

We really began to drove down expenses in the fourth quarter of 2014 and so there was a little bit over $1 million drawn down in the fourth quarter 2014 and now $800,000 in the first quarter.

Okay.

See if anybody else has a question?

Thank you. Our next question is a follow question from the line of Gregg Hillman. Please proceed with your question.

Yes. Maybe see – on the recent – you have a change in I believe the [national] [ph] compensation program recently – you had stock option sort of stock appreciation rights, and what was – I believe with a contingent upon management's hitting certain targets in terms of EPS and what was that EPS targets?

You are talking about the long-term incentive plan since R issues – were issued in January?

There is a portion of those about 50% of the R issues were issued were based on time vesting and about 50% of the R issues issued are based on hitting a certain targets – performance targets.

Performance targets in terms of what?

EPS.

Can you give me the range of that or what was their performance targets and what was the timeframe to hit them?

Okay. I think Gregg they varied between about where we are today all the way up to $3 of EPS. So there is a broad range, there are multiple targets in there and then have to hit within a certain timeframe as well over the year.

Can you detect timeframe was that like three years or four years or something like that or five years?

Yes. Off the top of head, I don't want to say Gregg, but it was something along those lines.

Okay. Okay. Thanks. That's all I wanted to check on. Thank you.

Okay. Thanks.

Thanks Gregg.

There are no further questions at this time. I would like to turn the floor back over to Greg Probert for closing comments.

Thanks again for your support and participating in today's call. We like to remind everyone that next week we will be Los Angeles presenting at the B. Riley & Company 16th Annual Investor Conference. We hope to see many of you there. Thank you. And have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.