Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe to be appropriate. For example, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are more fully described in this report, including the risks set forth under “Risk Factors” in Item 1A, and in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, but include the following:

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

We are a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. We are a Utah corporation with our principal place of business in Lehi, Utah, and sell our products to a sales force of independent distributors who uses the products themselves or resells them to consumers.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation of our financial information as of March 31,June 30, 2019, and for the three-monththree and six-month periods ended March 31,June 30, 2019 and 2018. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2019.

It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Noncontrolling interestinterests decreased as a result of the net loss attributable to the noncontrolling interests by $28,000$0.1 million and $0.2$0.3 million during the threesix months ended March 31,June 30, 2019 and 2018, respectively. As of March 31,June 30, 2019 and December 31, 2018, noncontrolling deficits were $25,000 and noncontrolling interests were $35,000 and $0.1 million, respectively.

We recorded $1.6$0.4 million and $0$2.0 million of restructuring related expenses during the three and six months ended March 31,June 30, 2019, respectively. We recorded no restructuring related expenses during the three and 2018, respectively, related to severance costs which were recorded in selling, general and administrative expenses.six months ended June 30, 2018. Accrued severance and rentrestructuring related costs were $1.6$1.0 million and $0.3 million as of March 31,June 30, 2019 and December 31, 2018, respectively.

During the second quarter of 2018, we announced the retirement of our Chief Executive Officer. As a result, we recorded $1.5 million of transition-related expenses during the three and six months ended June 30, 2018. As of June 30, 2019 and December 31, 2018, accrued transition costs were $0.6 million and $1.0 million, respectively.

 

We adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842): Accounting for Leases effective January 1, 2019. This update requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at lease commencement date. See Note 8 - Leases for additional disclosure of the adoption of Topic 842.

In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income. This update allows a reclassification of stranded tax effects, resulting from the Tax Cuts and Jobs Act 2017, from accumulated other comprehensive income to retained earnings. This ASU will beis effective for annual periods beginning after December 15, 2018 with early adoption permitted. The adoption of ASU 2018-02 did not have a material effect on our results of operations, consolidated financial statements and footnote disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair

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

Our trading securities portfolio totaled $1.4 million at March 31,June 30, 2019, and $1.3 million at December 31, 2018, and generated realized gains of $0.1 million$40,000 and $0$34,000 for the three months ended March 31,June 30, 2019 and 2018, respectively, and $173,000 and $11,000 for the six months ended June 30, 2019 and 2018, respectively.

On July 11, 2017, we entered into a revolving credit agreement with Bank of America, N.A., with a borrowing limit of $25.0 million, that matures on July 11, 2020 (the “Credit Agreement”). We pay interest on any borrowings under the Bank of America Credit Agreement at LIBOR plus 1.25 percent (3.74(3.65 percent and 3.73 percent as of March 31,June 30, 2019 and December 31, 2018, respectively)2018), and an annual commitment fee of 0.200.2 percent on the unused portion of the commitment. We are required to settle our net borrowings under the Credit Agreement only upon maturity, and as a result, have classified our outstanding borrowings as non-current on our condensed consolidated balance sheet as of March 31,June 30, 2019. At March 31,June 30, 2019, and December 31, 2018, thethere was no outstanding balance under the revolving credit facility was $0.Credit Agreement.

The Credit Agreement contains customary financial covenants, including financial covenants relating to our solvency, leverage, and minimum EBITDA. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, and merger, consolidation and the transfer of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by our manufacturing facility, accounts receivable balance, inventory balance and other assets. WeAs of June 30, 2019, we were in compliance with the debt covenants set forth in the Credit Agreement as of March 31, 2019.Agreement.

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

Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and six months ended March 31,June 30, 2019 and 2018 (dollar and share amounts in thousands, except for per share information): 

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

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

We also maintain a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  Under the 2012 Incentive Plan, any shares subject to award, or awards forfeited or reacquired by the Company issued under the 2009 Incentive Plan are available for award up to a maximum of 400,000 shares.

Stock Options

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

Stock option activity for the three-monthsix-month period ended March 31,June 30, 2019, is as follows (amounts in thousands, except per share information):

Share-based compensation expense from time-based stock options for the three-month periods ended March 31,June 30, 2019 and 2018, was approximately $0 and $13,000,$0.1 million, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 2019 and 2018, was approximately $0 and $0.1 million, respectively. As of March 31,June 30, 2019 and December 31, 2018, thethere was no unrecognized share-based compensation expense related to the grants described above was $0.above.

At March 31,June 30, 2019, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 1,110,000940,000 shares of common stock was $0.3 million. At December 31, 2018, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 1,114,000 shares of common stock shares of common stock was $0.2 million.

For the three-month periodsix-month periods ended March 31,June 30, 2019 we did not grant any stock options to purchase shares of the common stock under the 2012 Stock Incentive Plan to our board members, executive officers or other employees.

As of March 31,June 30, 2019 and December 31, 2018, we did not have any unvested performance-based stock options outstanding.

Restricted Stock Units

Our outstanding RSUsrestricted stock units (“RSUs”), include time-based RSUs, which vest over differing periods of time ranging from 12 months to up to 36 months from the RSU grant date, as well as performance-based RSUs, which vest upon achieving targets relating to sales growth, earnings-per-share, and/or stock price levels. RSUs givengranted to members of the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At March 31,June 30, 2019 and December 31, 2018, there were 93,00078,000 and 80,000 respectively, vested RSUs, respectively, given to the Board of Directors that had a restriction period.

Restricted stock unit activity for the three-monthsix-month period ended March 31,June 30, 2019, is as follows (share amounts(amounts in thousands, except per share information):

During the three-monthsix-month period ended March 31,June 30, 2019, we granted 281,000333,000 RSUs under the 2012 Incentive Plan to ourthe Board of Directors, executive officers and other employees, which were composedcomprised of both time-based RSUs and share-priceshare-priced performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $8.61$8.59 per share and vest in annual installments over a three-year period from the grant date.date or according to the restrictions for the Board of Directors noted above. The share-priceshare-priced performance-based RSUs were issued with a weighted-average grant date fair value of $4.38 per share and vest upon achieving share-priceshare-priced targets over a three-year period from the grant date.

Except for share-priced performance RSUs, RSUs are valued at market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period. For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. Using assumptions previously determined for the application of the option pricing model at the valuation date, the Finnerty Model discount for lack of marketability is approximately 11.913.4 percent for a common share.

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

Share-based compensation expense for RSUs for the three-month periods ended June 30, 2019 and 2018, was approximately $0.5 million and $0.5 million, respectively. Share-based compensation expense from RSUs for the three-monthsix-month periods ended March 31,June 30, 2019 and 2018, was approximately $0.1$0.6 million and $0.5$1.0 million, respectively. As of March 31,June 30, 2019 and December 31, 2018, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $2.3$2.1 million and $1.8 million, respectively. As of March 31, 2019, theThe remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.70.9 years.

Share-based compensation expense related to performance-based RSUs for the three-month periodperiods ended March 31,June 30, 2019 and 2018, was $0.1 million and $0, respectively. Share-based compensation expense related to performance-based RSUs for the six-month periods ended June 30, 2019 and 2018, was $0.2 million and $0, respectively. Should we attain all of the metrics related to the performance-based RSU grant,grants, we would recognize up to $2.7$2.1 million of potential share-based compensation expense. We currently expect to recognize an additional $1.1 million of that potential share-based compensation expense.

The number of shares issued upon vesting of RSUs granted pursuant to our share-based compensation plans is net of the minimum statutory withholding requirements that we pay on behalf of our employees, which was 11,00023,000 and 40,000 shares for the three-month periodsix-month periods ended March 31,June 30, 2019 and 2018, respectively. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the repurchase program described above.

 

We have four business segments. These business segments are components of(Asia, Europe, North America and Latin America and Other) based primarily upon the Company for which separate information is available that is evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing relative performance.

Historically, our operating segments were based on brand, customer base, geographical operations with three operating business segments operate under the Nature’s Sunshine Products brand (NSP Americas; NSP Russia, Central and Eastern Europe; and NSP China), and one operating business segment operates under the Synergy® WorldWide brand. The NSP Russia, Central

During the second quarter of 2019, we realigned into geographic focused operating business segments across brands to further align regional strategies and Eastern Europe segment also includes our wholesale business,drive synergies in which we sell our productsproduct, organizational and go-to-market strategies in local markets. Our internal reporting structure was reorganized to various locally-managed entities independentsupport the new reporting segments and the chief operating decision maker now reviews the operating results of the Company that we have granted distribution rights forfour segments utilizing a geographic focused format. The presentation of the relevant market. comparative information has been recast to conform to the 2019 presentation.

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

Net sales generated by each of the Company’sour product lines is set forth below (dollar amounts in thousands):

 

We adopted ASU No. 2016-02, Leases (Topic 842): Accounting for Leases, as of January 1, 2019. This update requires lessees to recognize right-of-use assets and lease liabilities arising from leases. We elected certain practical expedients permitted under the transition guidance. We elected the optional transition method that allows for a cumulative-effect adjustment and will not restate prior periods. Under the new guidance, all leases will continue to be classified as operating.

Adoption of the new standard resulted in recording of additional net operating lease right-of-use assets and lease liabilities of approximately $23.1 million and $24.0 million, respectively, as of January 1, 2019. The difference between the operating lease right-of-use assets and lease liabilities reflects deferred rent balances at the time of adoption. The standard did not materially impact consolidated net earnings and cash flows.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and six months ended March 31,June 30, 2018, was primarily attributed to foreign losses in the period, primarilyduring those periods, largely related to China, that didwere not expected to provide future tax benefit, as well as net unfavorable foreign tax related items.

Our U.S. federal income tax returns for 2015 through 2017 are open to examination for federal tax purposes. We have several foreign tax jurisdictions that have open tax years from 2012 through 2018. The Internal Revenue Service has notified us they will be conducting an audit of our U.S. federal income tax return for the 2017 tax year.

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

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 March 31,At June 30, 2019 and December 31, 2018, accrued liabilities were $0.3 million and $0.3 million, respectively, related to non-income tax contingencies. While we believe that the assumptions and estimates used to determine this liabilitycontingent liabilities are reasonable, the ultimate outcome of thosethese matters cannot presently be determined. We believe future payments related to these matters could range from $0 to approximately $3.4$3.5 million.

We are a party to various other legal proceedings in the United States and several foreign jurisdictions related to value-added tax assessments and other civil litigation. As of March 31,June 30, 2019 and December 31, 2018, accrued liabilities were $1.9$2.0 million and $1.7 million, respectively, related to the estimated outcome of these proceedings. In addition, we are a party to other litigation where there is a reasonable possibility that a loss may be incurred, 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 $0.4 million.

During the three and six months ended March 31,June 30, 2019, and 2018,NSP China did not borrow any amounts from the Company or our joint venture inpartner. During the three and six months ended June 30, 2018, NSP China borrowed $0 and $2.0 million from the Company respectively. These notes are payable in one year and bear interest of 3.0 percent. As of March 31, 2019 and December 31, 2018 outstanding borrowings by the joint venture from the Company were $6.1 million and $6.0 million, respectively. These notes eliminate in consolidation.

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 the Company’sour hierarchy for itsour assets, measured at fair value on a recurring basis, as of December 31, 2018 (dollar amounts in thousands):

For the threesix months ended March 31,June 30, 2019, and for the year ended December 31, 2018, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).

 

The carrying amounts reflected on the condensed consolidated balance sheetsheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature. The carrying amount reflected on the condensed consolidated balance sheetsheets for the revolving credit facility approximateapproximates fair value due to it being variable-rate debt. During the threesix months ended March 31,June 30, 2019 and 2018, the Companywe did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

The following Management’s Discussion and Analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report, as well as the consolidated financial statements, the notes thereto, and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2018.2018, and our other reports filed since the date of such Form 10-K. During the second quarter of 2019, we realigned into geographic focused operating business segments across brands. The presentation of the comparative information has been recast to conform to the 2019 presentation.

 

 

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

Our independent distributors market and sell our products to customers and sponsor other independent distributors who also market our products to customers. Our sales are highly dependent upon the number and productivity of our independent distributors. Growth in sales volume generally requires an increase in the productivity of our independent distributors and/or growth in the total number of independent distributors. We seek to motivate and provide incentives to our independent distributors by offering high quality products and providing independent distributors with product support, training seminars, sales conventions, travel programs and financial incentives.

In the firstsecond quarter of 2019, the Companywe experienced an increasea decrease in itsour consolidated net sales of 4.50.6 percent (or 7.12.3 percent increase in local currencies) compared to the same period in 2018. Asia net sales decreased approximately 1.7 percent (or 4.1 percent increase in local currencies) compared to the same period in 2018. Europe net sales increased approximately 8.3 percent (or 11.1 percent in local currencies) compared to the same period in 2018. NSP Russia, Central and Eastern EuropeNorth America net sales increaseddecreased approximately 18.92.5 percent (or 20.82.3 percent in local currencies) compared to the same period in 2018. NSP AmericasLatin America and Other net sales decreased approximately 7.73.2 percent (or 1.6 percent in local currencies) compared to the same period in 2018, (or 7.0 percent in local currencies). NSP China net sales increased approximately 52.4 percent compared to the same period in 2018 (or 61.4 percent in local currencies). Synergy WorldWide net sales increased approximately 10.0 percent compared to the same period in 2018 (or 14.7 percent in local currencies).2018. The strengtheningweakening of the U.S. dollar versus the local currencies, primarily in our Asian and European markets, resulted in a $2.3an approximate 2.3 percent, or $2.6 million, decrease of our net sales during the quarter.

Selling, general and administrative expenses increased $1.5 million during the three months ended March 31,June 30, 2019 decreased $2.3 million compared to the same period in 2018, butand decreased as a percentage of net sales were constant at 37.1 percent.to 34.2 percent from 36.5 percent in 2018. The increasedecrease in dollarsexpenses was primarily the result of restructuring charges of $1.6 million recorded during the period.efforts implemented in prior periods in order to improve operating results.

We distribute our products to consumers through an independent sales force comprised of independent Managers and Distributors, many of whom also consume our products. Typically a person who joins our independent sales force begins as a Distributor. An independent Distributor may earn Manager status by attaining certain product sales levels. On a worldwide basis, active independent Managers were approximately 14,00012,900 and 13,70013,100 and active independent Distributors and customers were approximately 232,800232,000 and 224,100217,200 at March 31,June 30, 2019 and 2018, respectively.

As an international business, we have significant sales and costs denominated in currencies other than the U.S. Dollar. Sales in international markets denominated in foreign currencies are expected to continue to represent a substantial portion of our sales. Likewise, we expect foreign markets with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of our overall sales and related operating expenses. Accordingly, changes in foreign currency exchange rates

The following table summarizes our unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the three months ended March 31,June 30, 2019 and 2018 (dollar amounts in thousands):