Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended March 31, 20182019
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from to           
 
Commission File Number: 001-34483

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NATURE’S SUNSHINE PRODUCTS, INC.
(Exact name of Registrant as specified in its charter) 
Utah 87-0327982
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2500 West Executive Parkway,2901 W Bluegrass Boulevard, Suite 100
Lehi, Utah 84043
(Address of principal executive offices and zip code)
 
(801) 341-7900
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one).Act.
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company  ox
(Do not check if a smaller reporting company)
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  ý.
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueNATRThe NASDAQ Stock Market LLC

The number of shares of Common Stock, no par value, outstanding on April 30, 2018,2019, was 19,060,40719,273,275 shares.
 

NATURE’S SUNSHINE PRODUCTS, INC.
FORM 10-Q
 
For the Quarter Ended March 31, 20182019
 
Table of Contents
 
    
 
    
  
  
  
  
  
  
    
 
    
 
    
 
    
    
 
    
 
    
 
    
 
    
 
    
 
    
 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to the Company'sour objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that the Company intends, expects, projects, believeswe intend, expect, project, believe or anticipatesanticipate 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 by management in light of theirour experience and their perception of historical trends, current conditions, expected future developments and other factors theywe 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, 2017,2018, but include the following:

changes in laws and regulations or their interpretation, applicable toregarding direct selling or the nutritional supplement industry may prohibit or restrict the Company'sour ability to sell itsour products in some markets or require the Companyus to make changes to itsour business model in some markets;markets.
extensive government regulations to which the Company's products, business practices and manufacturing activities are subject;
legal challenges to the Company's direct selling program or to the classification of its independent distributors;
effect of complex legal and regulatory requirements, particularly in China and South Korea;
impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
itsthe Company’s ability to attract and retain independent distributors;
the loss of one or more key independent distributors who have a significant sales network;
the full implementation of itsthe Company’s joint venture for operations in China with Fosun Industrial Co., Ltd.;
registration of products for sale in China,foreign markets, or difficulty or increased cost of importing products into China;foreign markets;
cyber securitycybersecurity threats and exposure to data loss;
the storage, processing, and use of data, some of which contain personal information, are subject to complex and evolving privacy and data protection laws and regulations
reliance on information technology infrastructure;
the effect of fluctuating foreign exchange rates;
liabilities and obligations arising from improper activity by itsthe Company’s independent distributors;
its relationship with, and its inability to controlfailure of the actions of, itsCompany’s independent distributors and other third partiesto comply with whom it does business;advertising laws;
changes to itsthe Company’s independent distributor compensation plans;
geopolitical issues and conflicts;
negative consequences resulting from difficult economic conditions, including the availability of liquidity or the willingness of itsthe Company’s customers to purchase products;
risks associated with the manufacturing of the Company's products;
uncertainties relating to the application of transfer pricing, duties, value-added taxes, and other tax regulations, and changes thereto;
changes in tax laws, treaties or regulations, or their interpretation, includinginterpretation;
actions on trade relations by the impact of the Tax CutsU.S. and Jobs Act;
availability and integrity of raw materials;
the competitive nature of its business and the nutritional supplement industry;
negative publicity related to its products, ingredients, or direct selling organization and the nutritional supplement industry;foreign governments.
product liability claims; and
the sufficiency of trademarks and other intellectual property rights; andrights.
reliance on third-parties to distribute its products and provide support services to independent distributors.

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, the Companywe 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 itsour subsidiaries, are referred to as "we," "us," "our," "our Company" or “the Company.”



PART I FINANCIAL INFORMATION
 
Item 1.  FINANCIAL STATEMENTS
 
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
March 31,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
Assets 
  
 
  
Current assets: 
  
 
  
Cash and cash equivalents$42,303
 $42,910
$45,404
 $50,638
Accounts receivable, net of allowance for doubtful accounts of $440 and $395, respectively8,259
 8,888
Assets held for sale998
 998
Accounts receivable, net of allowance for doubtful accounts of $485 and $460, respectively8,259
 7,751
Inventories43,655
 44,047
42,937
 42,048
Prepaid expenses and other5,693
 5,666
6,697
 6,388
Total current assets100,908
 102,509
103,297
 106,825
      
Property, plant and equipment, net67,094
 69,106
61,961
 64,061
Operating lease right-of-use assets21,777
 
Investment securities - trading1,753
 1,980
1,405
 1,308
Intangible assets, net686
 709
609
 618
Deferred income tax assets8,354
 8,283
8,786
 9,056
Other assets12,755
 12,608
10,944
 11,148
$191,550
 $195,195
$208,779
 $193,016
      
Liabilities and Shareholders’ Equity 
  
 
  
Current liabilities: 
  
 
  
Accounts payable$5,143
 $4,215
$4,911
 $5,219
Accrued volume incentives and service fees20,064
 18,774
20,772
 20,562
Accrued liabilities24,594
 24,980
28,520
 34,801
Deferred revenue2,279
 3,348
1,232
 1,197
Related party note1,013
 506
1,530
 1,530
Income taxes payable1,598
 1,834
1,286
 3,378
Current portion of operating lease liabilities4,088
 
Total current liabilities54,691
 53,657
62,339
 66,687
      
Liability related to unrecognized tax benefits4,715
 4,633
2,128
 2,192
Long-term debt and revolving credit facility7,725
 13,181
Long-term portion of operating lease liabilities18,818
 
Deferred compensation payable1,753
 1,980
1,405
 1,308
Long-term deferred income tax liabilities783
 770
1,548
 1,556
Other liabilities872
 1,242
519
 705
Total liabilities70,539
 75,463
86,757
 72,448
      
Shareholders’ equity: 
  
 
  
Common stock, no par value, 50,000 shares authorized, 19,046 and 18,919 shares issued and outstanding, respectively131,830
 131,525
Common stock, no par value, 50,000 shares authorized, 19,273 and 19,204 shares issued and outstanding, respectively133,725
 133,684
Accumulated deficit(720) (2,072)(315) (2,072)
Noncontrolling interests246
 411
35
 63
Accumulated other comprehensive loss(10,345) (10,132)(11,423) (11,107)
Total shareholders’ equity121,011
 119,732
122,022
 120,568
$191,550
 $195,195
$208,779
 $193,016
 
See accompanying notes to condensed consolidated financial statements.

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share information)
(Unaudited) 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net sales$87,342
 $83,098
$91,272
 $87,342
Cost of sales(22,713) (21,728)(23,429) (22,713)
Gross profit64,629
 61,370
67,843
 64,629
      
Operating expenses: 
  
 
  
Volume incentives31,362
 28,983
31,013
 31,362
Selling, general and administrative32,386
 30,336
33,852
 32,386
Operating income881
 2,051
2,978
 881
Other income, net740
 1,275
Other income (expense), net(48) 740
Income before provision for income taxes1,621
 3,326
2,930
 1,621
Provision for income taxes1,288
 1,463
1,201
 1,288
Net income333
 1,863
1,729
 333
Net loss attributable to noncontrolling interests(165) (297)(28) (165)
Net income attributable to common shareholders$498
 $2,160
$1,757
 $498
      
Basic and diluted net income per common share: 
  
 
  
      
Basic earnings per share attributable to common shareholders$0.03
 $0.11
$0.09
 $0.03
      
Diluted earnings per share attributable to common shareholders$0.03
 $0.11
$0.09
 $0.03
      
Weighted average basic common shares outstanding19,010
 18,845
19,268
 19,010
Weighted average diluted common shares outstanding19,353
 19,260
19,585
 19,353
   
Dividends declared per common share$
 $0.10
 
See accompanying notes to condensed consolidated financial statements.

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited) 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net income$333
 $1,863
$1,729
 $333
Foreign currency translation (loss) gain (net of tax)(213) 912
Foreign currency translation loss (net of tax)(316) (213)
Total comprehensive income$120
 $2,775
$1,413
 $120
 
See accompanying notes to condensed consolidated financial statements.
 
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited) 
Common Stock 
Accumulated
Deficit
 
Noncontrolling
Interests
 
Accumulated
Other
Comprehensive
Loss
 TotalCommon Stock 
Accumulated
Deficit
 
Noncontrolling
Interests
 
Accumulated
Other
Comprehensive
Loss
 Total
Shares Value Shares Value 
Balance at December 31, 2017 (as reported)18,919
 $131,525
 $(2,072) $411
 $(10,132) $119,732
Cumulative effect of change in accounting principle
 
 854
 
 
 854
Balance at January 1, 2018 (as adjusted)18,919
 131,525
 (1,218) 411
 (10,132) 120,586
Balance at December 31, 201819,204
 $133,684
 $(2,072) $63
 $(11,107) $120,568
Share-based compensation expense
 543
 
 
 
 543

 230
 
 
 
 230
Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax127
 (238) 
 
 
 (238)69
 (189) 
 
 
 (189)
Net income (loss)
 
 498
 (165) 
 333

 
 1,757
 (28) 
 1,729
Other comprehensive loss
 
 
 
 (213) (213)
 
 
 
 (316) (316)
Balance at March 31, 201819,046
 $131,830
 $(720) $246
 $(10,345) $121,011
Balance at March 31, 201919,273
 $133,725
 $(315) $35
 $(11,423) $122,022
 
See accompanying notes to condensed consolidated financial statements.

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited) 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
CASH FLOWS FROM OPERATING ACTIVITIES: 
  
 
  
Net income$333
 $1,863
$1,729
 $333
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
  
Provision for doubtful accounts46
 (22)31
 46
Depreciation and amortization2,601
 1,451
2,496
 2,601
Noncash lease expense1,394
 
Share-based compensation expense543
 778
230
 543
Gain on sale of property and equipment
 (16)45
 
Deferred income taxes(46) 263
258
 (46)
Purchase of trading investment securities(50) (266)(40) (50)
Proceeds from sale of trading investment securities265
 33
76
 265
Realized and unrealized (gains) losses on investments23
 (49)(133) 23
Foreign exchange gains(967) (1,303)
Foreign exchange (gains) losses64
 (967)
Changes in assets and liabilities: 
  
 
  
Accounts receivable683
 (926)(546) 683
Inventories856
 (850)(1,038) 856
Prepaid expenses and other current assets18
 (186)(357) 18
Other assets27
 88
117
 27
Accounts payable957
 346
(281) 957
Accrued volume incentives and service fees1,062
 2,471
164
 1,062
Accrued liabilities(1,148) (3,466)(5,683) (1,148)
Deferred revenue(1,069) 293
35
 (1,069)
Lease liabilities(1,086) 
Income taxes payable(261) (70)(2,112) (261)
Liability related to unrecognized tax benefits68
 59
(69) 68
Deferred compensation payable(227) 283
97
 (227)
Net cash provided by operating activities3,714
 774
Net cash provided by (used in) operating activities(4,609) 3,714
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
 
  
Purchases of property, plant and equipment(489) (2,711)(387) (489)
Proceeds from sale of property, plant and equipment
 522
Net cash used in investing activities(489) (2,189)(387) (489)
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
 
  
Payments of cash dividends
 (1,886)
Principal payments of new revolving credit facility(5,456) 
Net borrowings on previous revolving credit facility
 3,341
Principal payments of revolving credit facility(1,517) (5,456)
Proceeds from revolving credit facility1,517
 
Proceeds from borrowings on related party note500
 

 500
Net proceeds from the exercise of stock options(238) 
Payment of withholding taxes related to the vesting of restricted stock units
 (512)
Net cash (used in) provided by financing activities(5,194) 943
Proceeds from the exercise of stock awards
 228
Tax benefit from stock awards(189) (466)
Net cash used in financing activities(189) (5,194)
Effect of exchange rates on cash and cash equivalents1,362
 1,248
(49) 1,362
Net (decrease) increase in cash and cash equivalents(607) 776
Net decrease in cash and cash equivalents(5,234) (607)
Cash and cash equivalents at the beginning of the period42,910
 32,284
50,638
 42,910
Cash and cash equivalents at the end of the period$42,303
 $33,060
$45,404
 $42,303
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 
  
 
  
Cash paid for income taxes$1,519
 $1,180
$3,346
 $1,519
Cash paid for interest103
 94
24
 103
 
See accompanying notes to condensed consolidated financial statements.

NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(1)    Basis of Presentation
 
Nature’s Sunshine Products, Inc., together with its subsidiaries (hereinafter referred to collectively as the “Company”), isWe are a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company sells itsWe 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 useuses the products themselves or resellresells them to consumers.
 
Principles of Consolidation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals), considered necessary for a fair presentation of the Company’sour financial information as of March 31, 2018,2019, and for the three-month periods ended March 31, 20182019 and 2017.2018. 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, 2018.2019.
 
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2017.2018.

Noncontrolling Interests

Noncontrolling interest decreased as a result of the net loss attributable to the noncontrolling interests by $0.2 million$28,000 and $0.3$0.2 million during the three months ended March 31, 20182019 and 2017,2018, respectively. As of March 31, 20182019 and December 31, 2017,2018, noncontrolling interests were $0.2 million$35,000 and $0.4$0.1 million, respectively.

Restructuring related accruals and expenses

Accrued severance and rent costs were $0.5We recorded $1.6 million and $0.8 million as$0 of March 31, 2018 and December 31, 2017, respectively. The Company did not record any additional restructuring related expenses during the three months ended March 31, 2019 and 2018, respectively, related to severance costs which were recorded in selling, general and 2017,administrative expenses. Accrued severance and rent costs were $1.6 million and $0.3 million as of March 31, 2019 and December 31, 2018, respectively.

Recent Accounting Pronouncements
 
The CompanyWe adopted the requirements of the revenue from ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842): Accounting for Leases effective January 1, 2018 under2019. This update requires that lessees recognize right-of-use assets and lease liabilities that are measured at the modified retrospective approach. The cumulative effectpresent value of adopting Topic 606 on January 1, 2018 was a decrease to accumulated deficit of $0.9 million (net of tax).the future lease payments at lease commencement date. See Note 138 - Revenue RecognitionLeases for additional disclosure of the adoption of Topic 606.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This update amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. This update is effective for interim and annual periods beginning after December 15, 2017. The adoption of this ASU did not have a material impact on the Company’s results of operations, consolidated financial statements and footnote disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842): Accounting for Leases. This update specifies that lessees should recognize assets and liabilities arising from all leases, except for leases with a lease term of 12 months or less. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely

remain unchanged and shall continue to depend on its classification as a finance or operating lease. The ASU will be effective for annual periods beginning after December 15, 2018 with early adoption permitted. The adoption of this ASU will impact the classification of expenses on the statement of operations, primarily the classification between rent expense and interest expense, but is not expected to have a material impact on the Company’s net results of operations; however, it is also expected to gross-up the consolidated balance sheet as a result of recognizing a lease asset along with a similar lease liability.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of ASU 2017-09 did not have a material effect on the Company's results of operations, consolidated financial statements and footnote disclosures.842.

In February 2018, the FASBFinancial 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 be effective for annual periods beginning after December 15, 2018 with early adoption permitted. The Companyadoption 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 value measurements in Topic 820 based on the consideration of costs and benefits to promote the appropriate exercise and discretion by entities when considering fair value measurement disclosures and to clarify that materiality is currentlyan appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in this update are effective for reporting periods beginning after December 15, 2019, with early adoption permitted. We are evaluating the potential impact of this standardadoption on itsour condensed consolidated financial statements.

    
(2)    Inventories
 
The composition of inventories is as follows (dollar amounts in thousands):
 
March 31,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
Raw materials$9,744
 $9,522
$11,353
 $10,410
Work in progress2,168
 2,153
1,241
 1,524
Finished goods31,743
 32,372
30,343
 30,114
Total inventory$43,655
 $44,047
$42,937
 $42,048

(3)Property, Plant and Equipment

As of March 31, 2018 and December 31, 2017, the Company presented an eight-acre property in Provo, Utah as an asset held for sale. The Company originally acquired the property with the intent to erect a building for the corporate headquarters. As there is no intention to move the corporate headquarters to this location, Company management decided to sell the property. The property is currently under contract to sell. The Company anticipates the sale of the property to be completed during 2018. As the fair value of the property exceeds the carrying value, no loss was recognized during the three months ended March 31, 2018.

(4)    Investments
 
The Company’sOur trading securities portfolio totaled $1.8$1.4 million at March 31, 2018,2019, and $2.0$1.3 million at December 31, 2017,2018, and generated realized gains of $200$0.1 million and $51,000$0 for the three months ended March 31, 20182019 and 2017,2018, respectively.
 
(5)(4)    Revolving Credit Facility
 
On July 11, 2017, the Companywe 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 “Bank of America Credit“Credit Agreement”). In connection with the closing of the Bank of America Credit Agreement, the Company terminated its revolving credit agreement with Wells Fargo Bank, N.A. (the "Wells Fargo Credit Agreement") and satisfied in full the outstanding balance thereof through borrowings on the Bank of America Credit Agreement. The Company paysWe pay interest on any borrowings under the Bank of America Credit Agreement at LIBOR plus 1.25 percent (3.13(3.74 percent and 2.823.73 percent as of March 31, 20182019 and December 31, 2017,2018, respectively). The Company must pay, and an annual commitment fee of 0.20 percent on the unused portion of the commitment. The Company isWe are required to settle itsour net borrowings under the Bank of America Credit Agreement only upon maturity, and as a result, hashave classified itsour outstanding borrowings as non-current on itsour condensed consolidated balance sheet as of March 31, 2018.2019. At March 31, 20182019 and December 31, 2017,2018, the outstanding balance under the revolving credit facility was $7.7 million and $13.2 million, respectively.

$0.
 
The Bank of America Credit Agreement contains customary financial covenants, including financial covenants relating to the Company’sour solvency, leverage, and minimum EBITDA. In addition, the Bank of America 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 Bank of America Credit Agreement. The Bank of America Credit Agreement is collateralized by the Company'sour manufacturing facility, accounts receivable balance, inventory balance and other assets. The Company wasWe were in compliance with the debt covenants set forth in the Bank of America Credit Agreement as of March 31, 2018.2019.

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


Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three months ended March 31, 20182019 and 20172018 (dollar and share amounts in thousands, except for per share information): 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net income attributable to common shareholders:$498
 $2,160
$1,757
 $498
      
Basic weighted average shares outstanding19,010
 18,845
19,268
 19,010
      
Basic earnings per share attributable to common shareholders:$0.03
 $0.11
$0.09
 $0.03
      
Diluted shares outstanding 
  
 
  
Basic weighted-average shares outstanding19,010
 18,845
19,268
 19,010
Stock-based awards343
 415
317
 343
Diluted weighted-average shares outstanding19,353
 19,260
19,585
 19,353
      
Diluted earnings per share attributable to common shareholders:$0.03
 $0.11
$0.09
 $0.03
      
Potentially dilutive shares excluded from diluted-per-share amounts: 
  
 
  
Stock options155
 224
Stock-based awards511
 155
      
Potentially anti-dilutive shares excluded from diluted-per-share amounts: 
  
 
  
Stock options1,148
 1,201
Stock-based awards1,032
 1,148
 
Potentially dilutive shares excluded from diluted-per-share amounts include performance-based options to purchase shares of common stock for which certain earnings metricsperformance measures 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.
 
(7)(6)    Capital Transactions
Dividends

On May 10, 2017, the Company announced that its Board of Directors elected to suspend the payment of quarterly dividends. The Company's Board of Directors will periodically evaluate the Company’s dividend policy in the future. The

declaration of future dividends is subject to the discretion of the Company’s Board of Directors and will depend upon various factors, including the Company’s earnings, financial condition, restrictions imposed by any indebtedness that may be outstanding, cash requirements, future prospects and other factors deemed relevant by the Company's Board of Directors.
 
Share-Based Compensation
 
During the year ended December 31, 2012, the Company’sour 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 the Company’s common stock were originally authorized for the granting of awards under the 2012 Stock Incentive Plan. In January 2015, the Company’sour 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.

The CompanyWe also maintains the 2009 Incentive Plan,maintain a stock incentive plan, which was approved by shareholders in 2009.2009 (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
 
The Company’sOur outstanding stock options include time-based stock options, which vest over differing periods ranging from the date of issuance up to 48 months from the option grant date; and performance-based stock options, which have already vested upon achieving operating income margins of six, eight and ten percent as reported in four of five consecutive quarters over the term of the options.
 
Stock option activity for the three-month period ended March 31, 2018,2019, is as follows (amounts in thousands, except per share information):
Number of
Shares
 
Weighted Average
Exercise
Price Per Share
Number of
Shares
 
Weighted Average
Exercise
Price Per Share
Options outstanding at December 31, 20171,390
 $12.20
Options outstanding at December 31, 20181,114
 $12.23
Granted
 

 
Forfeited or canceled(65) 16.80
(4) 12.07
Exercised(30) 5.88

 
Options outstanding at March 31, 20181,295
 12.12
Options outstanding at March 31, 20191,110
 12.23
 
Share-based compensation expense from time-based stock options for the three-month periods ended March 31, 20182019 and 2017,2018, was approximately $13,000$0 and $0.1 million,$13,000, respectively. As of March 31, 20182019 and December 31, 2017,2018, the unrecognized share-based compensation expense related to the grants described above was $0 and $13,000, respectively.$0.

At March 31, 2019, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 1,110,000 shares of common stock was $0.3 million. At December 31, 2018, the aggregate intrinsic value of outstanding and exercisable stock options to purchase 1,295,0001,114,000 shares of common stock shares of common stock was $0.7$0.2 million. At December

For the three-month period ended March 31, 2017, the aggregate intrinsic value of outstanding2019, we did not grant any stock options to purchase 1,390,000 shares of the common stock under the exercisable options2012 Stock Incentive Plan to purchase 1,293,000 shares of common stock, and options to purchase 92,000 shares of common stock expected to vest was $0.9 million, $0.9 million and $0, respectively.our board members, executive officers or other employees.

For the three-month period ended March 31, 2018, the Companywe issued 30,000 shares of common stock upon the exercise of stock options at an average exercise price of $5.88 per share. The aggregate intrinsic values of options exercised during the three-month period ended March 31, 2018 was $0.2 million and the Companywe recognized $32,000 of tax benefits from the exercise of stock options during the period. There was no stock option activity for the three-month period ended March 31, 2017.


As of March 31, 20182019 and December 31, 2017, the Company2018, we did not have any unvested performance-based stock options outstanding.
 
Restricted Stock Units
 
The Company’sOur outstanding restricted stock units ("RSUs"),RSUs include time-based RSUs, which vest over differing periods ranging from 12 months up to 4836 months from the RSU grant date, as well as performance-based RSUs, which vest either upon achieving cumulative annual nettargets relating to sales growth, targets over a rolling one-year period earnings-per-share, and/or upon achieving earnings-per-share targets over a rolling one-year period.stock price levels. RSUs given to the Board of Directors contain a restriction period in which the shares are not issued until two years after vesting. At March 31, 20182019 and December 31, 2017,2018, there were 95,00093,000 and 96,000,80,000, respectively, vested RSUs given to the Board of Directors that had a restriction period.
 
Restricted stock unit activity for the three-month period ended March 31, 2018,2019, is as follows (share amounts in thousands, except per share information):
Number of
Shares
 
Weighted Average
Grant Date
Fair Value
Number of
Shares
 
Weighted Average
Grant Date
Fair Value
Restricted Stock Units outstanding at December 31, 2017728
 $11.56
Restricted Stock Units outstanding at December 31, 20181,058
 $8.87
Granted203
 11.30
281
 6.98
Forfeited
 
(288) 10.57
Issued(138) 12.53
(82) 11.56
Restricted Stock Units outstanding at March 31, 2018793
 11.32
Restricted Stock Units outstanding at March 31, 2019969
 7.59
 

During the three-month period ended March 31, 2018, the Company2019, we granted 203,000281,000 RSUs under the 2012 Incentive Plan to the Company’sour executive officers and other employees, which were composed of both time-based RSUs and net sales and adjusted EBITDAshare-price performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $11.36$8.61 per share and vest in annual installments over a three-year period from the grant date. The net sales and adjusted EBTIDA earnings-per-shareshare-price performance-based RSUs were issued with a weighted-average grant date fair value of $11.20$4.38 per share and vest upon achieving share-price 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. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. This model has gained recognition through its ability to address the magnitude of the discount by considering the volatility of a company’s stock price and the length of restriction. The concept underpinning the Finnerty Model is that restricted stock cannot be sold 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 11.9 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 included performance periods of three years, expected volatility of 50 percent, and a range of risk free rates between 2.1 percent and 2.9 percent.
 
Share-based compensation expense from RSUs for the three-month periods ended March 31, 20182019 and 2017,2018, was approximately $0.5$0.1 million and $0.7$0.5 million, respectively. As of March 31, 20182019 and December 31, 2017,2018, the unrecognized share-based compensation expense related to the grants described above was $2.2$2.3 million and $1.3$1.8 million, respectively. As of March 31, 2018,2019, the remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.51.7 years.
 
The Company has not recognized any share-basedShare-based compensation expense related to the net sales and earnings-per-share performance-based RSUs for the three-month periodsperiod ended March 31, 2019 and 2018 was $0.1 million and 2017.$0, respectively. Should the Companywe attain all of the metrics related to the performance-based RSU grant, the Companywe would recognize up to $4.0$2.7 million of potential share-based compensation expense.
 
The number of shares issued upon vesting of RSUs granted pursuant to the Company'sour share-based compensation plans is net of the minimum statutory withholding requirements that the Company payswe pay on behalf of itsour employees, which was 40,00011,000 and 38,00040,000 shares for the three-month period ended March 31, 20182019 and 2017,2018, 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.

(8)(7)    Segment Information
 
The Company hasWe have four business segments. These business segments are components of 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.

The Company hasOur four business segments that are divided based on the different characteristics of their distributor and customer bases, distributor compensation plans and product formulations, as well as the internal organization of itsour officers and their responsibilities and business operations. Three business segments operate under the Nature’s Sunshine Products brand (NSP Americas; NSP Russia, Central and Eastern Europe; and NSP China), and one business segment operates under the Synergy® WorldWide brand. The NSP Russia, Central and Eastern Europe segment also includes the Company’sour wholesale business, in which the Company sells itswe sell our products to various locally-managed entities independent of the Company that the Company haswe have granted distribution rights for the relevant market. 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. The Company evaluatesWe evaluate performance based on contribution margin (loss) by segment before consideration of certain inter-segment transfers and expenses.

In the fourth quarter of 2017, the Company moved the reporting of its wholesale business, in which the Company sells its products to a locally managed entity independent of the Company that has distribution rights for the market, from the NSP China segment to the NSP Russia, Central and Eastern Europe segment. The net sales and contribution margin for the three months ended March 31, 2017 were recast to reflect that change.


Reportable business segment information is as follows (dollar amounts in thousands):
 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net sales: 
  
 
  
NSP Americas$41,872
 $44,645
$38,667
 $41,872
NSP Russia, Central and Eastern Europe9,551
 8,446
11,358
 9,551
Synergy WorldWide31,817
 27,313
34,994
 31,817
NSP China4,102
 2,694
6,253
 4,102
Total net sales87,342
 83,098
91,272
 87,342
      
Contribution margin (1): 
  
 
  
NSP Americas17,335
 19,195
17,351
 17,335
NSP Russia, Central and Eastern Europe3,204
 2,924
3,795
 3,204
Synergy WorldWide9,508
 8,199
10,731
 9,508
NSP China3,220
 2,069
4,953
 3,220
Total contribution margin33,267
 32,387
36,830
 33,267
      
Selling, general and administrative (2)32,386
 30,336
33,852
 32,386
Operating income881
 2,051
2,978
 881
      
Other income, net740
 1,275
(48) 740
Income before provision for income taxes$1,621
 $3,326
$2,930
 $1,621


(1) Contribution margin consists of net sales less cost of sales and volume incentives expense.

(2) Service fees in the NSP China segment related to sales in China occurring after the Company's receipt of its direct selling license and pre-opening sales through Hong Kong, totaled $1.5$2.2 million and $0.9$1.5 million for the three-month periods ended March 31, 20182019 and 2017,2018, respectively. These service fees are included in the Company'sour selling, general and administrative expenses.

From an individual country perspective, only the United States and South Korea comprisecomprised 10 percent or more of consolidated net sales for the three-month periods ended March 31, 20182019 and 2017,2018, as follows (dollar amounts in thousands):
 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
Net sales: 
  
 
  
United States$35,227
 $37,735
$33,961
 $35,227
South Korea14,584
 11,346
18,528
 14,584
Other37,531
 34,017
38,783
 37,531
$87,342
 $83,098
$91,272
 $87,342
 

Revenue generated by each of the Company’s product lines is set forth below (dollar amounts in thousands):
 
Three Months Ended
March 31,
Three Months Ended
March 31,
2018 20172019 2018
NSP Americas: 
  
 
  
General health$17,746
 $19,866
$16,918
 $17,746
Immune5,544
 5,073
4,760
 5,544
Cardiovascular3,100
 3,316
2,853
 3,100
Digestive11,712
 12,148
11,051
 11,712
Personal care1,825
 1,886
1,556
 1,825
Weight management1,945
 2,356
1,529
 1,945
41,872
 44,645
38,667
 41,872
NSP Russia, Eastern and Central Europe: 
  
 
  
General health$4,131
 $3,943
$4,599
 $4,131
Immune1,029
 862
1,335
 1,029
Cardiovascular695
 595
903
 695
Digestive2,431
 2,088
2,854
 2,431
Personal care960
 642
1,414
 960
Weight management305
 316
253
 305
9,551
 8,446
11,358
 9,551
Synergy WorldWide: 
  
 
  
General health$8,640
 $6,687
$10,932
 $8,640
Immune149
 121
80
 149
Cardiovascular13,330
 11,103
14,616
 13,330
Digestive3,825
 3,465
3,929
 3,825
Personal care2,140
 2,067
1,841
 2,140
Weight management3,733
 3,870
3,596
 3,733
31,817
 27,313
34,994
 31,817
NSP China: 
  
 
  
General health$343
 $495
$342
 $343
Immune146
 47
77
 146
Cardiovascular561
 517
750
 561
Digestive2,456
 1,431
1,567
 2,456
Personal care253
 42
2,465
 253
Weight management343
 162
1,052
 343
4,102
 2,694
6,253
 4,102
$87,342
 $83,098
$91,272
 $87,342

From an individual country perspective, only the United States comprised 10 percent or more of consolidated property, plant and equipment as follows (dollar amounts in thousands):
 
March 31,
2018
 December 31,
2017
March 31,
2019
 December 31,
2018
Property, plant and equipment: 
  
 
  
United States$64,032
 $65,928
$58,969
 $60,606
Other3,062
 3,178
2,992
 3,455
Total property, plant and equipment$67,094
 $69,106
$61,961
 $64,061
 

8) Leases

Adoption of ASU Topic 842

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.

We lease certain retail stores, warehouses, distribution centers, and office spaces. 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 right-of-use assets and lease liabilities are as follows (dollar amounts in thousands):

 March 31,
2019
 January 1,
2019
Assets   
Operating lease right-of-use assets$21,777
 $23,143
    
Liabilities   
Current4,088
 4,426
Long-term18,818
 19,566
Total operating lease liabilities$22,906
 $23,992

We had operating lease costs of approximately $1.6 million for the three-months ended March 31, 2019. We had short-term lease costs of approximately $46,000 for the three-months ended March 31, 2019. 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 Condensed Consolidated Balance Sheets.

Supplemental cash flow information related to operating leases for the three-months ended March 31, 2019 was as follows:

Payments of $1.1 million against amounts included in the measurement of lease liabilities.
Lease assets obtained in exchange for lease liabilities totaled $23.1 million.

The weighted-average remaining lease term for operating leases was 7.6 years. The weight-average discount rate for operating leases was 4.23% .

There were no material operating leases that we have entered into and that were yet to commence as of March 31, 2019.


The approximate aggregate commitments under non-cancelable operating leases in effect at March 31, 2019 and December 31, 2018, were as follows (dollar amounts in thousands):

 March 31,
2019
 December 31,
2018
2019$4,155
 $5,646
20204,671
 4,692
20213,792
 3,864
20222,326
 2,367
20231,985
 2,162
Thereafter10,167
 10,296
Total lease payments$27,096
 $29,027
Less: Imputed interest (1)4,190
  
Present value of lease liabilities$22,906
  

(1) Calculated using our corporate borrowing rate based on the term of each lease ranging from 4.09% to 4.29%.

(9)    Income Taxes
 
For the three months ended March 31, 2019 and 2018, and 2017, the Company’sour provision for income taxes, as a percentage of income before income taxes was 79.541.0 percent and 44.079.5 percent, respectively, compared with U.S. federal statutory rates of 21.0 percent and 35.0 percent, respectively.percent.
 
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2018,2019, was primarily attributed to current year foreign losses primarily related to China, that presently do not provide future tax benefit, as well as net unfavorable foreign items.
 
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2017,2018, was primarily attributed to current year foreign losses in the period, primarily related to China, that presently dodid not provide future tax benefit and an adjustment of a prior year deferred tax asset related toas well as net unfavorable foreign currency translation amounts offset by net favorable foreign items related to tax rate differences.items.

In December 2017,As the U.S. Department of the Treasury is working on finalizing Treasury Regulations with respect to the Tax Cuts and Jobs Act (Tax Reform Act) was signed into law. During the year ended December 31, 2017, the Company recognized provisional tax impacts related to the re-measurement of its, future changes could likewise affect recorded deferred income tax assets and liabilities in accordance with the Tax Reform Act and related guidance provided by SAB 118. Additionally, it was estimated at December 31, 2017later periods. Management is not aware of any such additional changes that the Company would have no one-time, transition taxa material effect on deemed repatriation. Asour results of March 31, 2018, no additional adjustments related to these items have been made; however, adjustments may be necessary in future periods due to the significant complexity of the Tax Reform Act and anticipated additional regulatory guidanceoperations, cash flows or technical corrections that may be forthcoming as well as actions the Company may take as a result of tax reform.financial position.

Because of the complexity of the new Global Intangible Low-taxed Income (GILTI) rules and the Foreign Derived Intangible Income (FDII) rules, we are continuing to evaluate these provisions of the Tax Reform Act and the application of ASC 740. We are continuing to gather additional information and expect to complete our accounting within the prescribed measurement period. 

The Company’sOur U.S. federal income tax returns for 20142015 through 2016,2017, are open to examination for federal tax purposes. The Company hasWe have several foreign tax jurisdictions that have open tax years from 20112012 through 2017.2018.
 
As of March 31, 20182019 and December 31, 2017, the Company2018, we had accrued $4.7$2.1 million and $4.6$2.2 million, respectively, related to unrecognized tax positions. This net increasedecrease was primarily attributed to increasesdecreases in transfer pricingforeign tax contingencies.
 
Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes itswe believe our tax estimates are reasonable, the Companywe can make no assurance that the final tax outcome of these matters will not be different from that which it haswe have reflected in itsour historical income tax provisions and accruals. Such differences could have a material impact on the Company’sour income tax provision and operating results in the period in which the Company makeswe make such determination.
 
(10)    Commitments and Contingencies
 
Legal Proceedings
 
The Company isWe 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 the Company’sour 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 theour business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintainsWe 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 the Company,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
 
The Company hasWe 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. The Company providesWe 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. The Company providesWe provide provisions for U.S. state sales taxes in each of the states where the Company haswe have nexus. As of March 31, 20182019 and December 31, 2017,2018, accrued liabilities were $0.2$0.3 million and $0.4$0.3 million, respectively, related to non-income tax contingencies. While management believeswe believe that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company believesWe believe future payments related to these matters could range from $0 to approximately $3.9$3.4 million.
 
Other Litigation
 
The Company isWe 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. As of March 31, 20182019 and December 31, 2017,2018, accrued liabilities were $1.2$1.9 million and $1.5$1.7 million, respectively, related to the estimated outcome of these proceedings. In addition, the Company iswe 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 the Companywe cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided.  The Company believesWe believe future payments related to these matters could range from $0 to approximately $2.0$0.4 million.
 
(11)     Related Party Transactions

During the three months ended March 31, 2019 and 2018, the Company'sour joint venture in China borrowed $0 and $2.0 million from the Company, and $0.5 million the Company's joint venture partner.respectively. These notes are payable in one year and bear interest of 3.0 percent. As of March 31, 20182019 and December 31, 2017 outstanding borrowings by the joint venture from the Company's JV partner were $1.0 million and $0.5 million, respectively. As of March 31, 2018 and December 31, 2017 outstanding borrowings by the joint venture from the Company were $4.0$6.1 million and $2.0$6.0 million, respectively. TheThese notes betweeneliminate in consolidation.

During the three months ended March 31, 2019 and 2018, our joint venture in China borrowed $0 and $0.5 million from our joint venture partner, 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 our JV partner were $1.5 million and $1.5 million, respectively. These notes are presented as current liabilities on the Company eliminate in consolidation.Condensed Consolidated Balance Sheets.

(12)    Fair Value Measurements
 
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 the Company’s hierarchy for its assets, measured at fair value on a recurring basis, as of March 31, 20182019 (dollar amounts in thousands):
Level 1 Level 2 Level 3  Level 1 Level 2 Level 3  
Quoted Prices
in Active
Markets for
Identical Assets
 Significant
Other
Observable
Inputs
 Significant
Unobservable
Inputs
 TotalQuoted Prices
in Active
Markets for
Identical Assets
 Significant
Other
Observable
Inputs
 Significant
Unobservable
Inputs
 Total
Investment securities - trading$1,753
 
 
 $1,753
$1,405
 
 
 $1,405
Total assets measured at fair value on a recurring basis$1,753
 $
 $
 $1,753
$1,405
 $
 $
 $1,405
 
The following table presents the Company’s hierarchy for its assets, measured at fair value on a recurring basis, as of December 31, 20172018 (dollar amounts in thousands):
 
Level 1 Level 2 Level 3  Level 1 Level 2 Level 3  
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 Total
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 Total
Investment securities - trading$1,980
 
 
 $1,980
$1,308
 
 
 $1,308
Total assets measured at fair value on a recurring basis$1,980
 $
 $
 $1,980
$1,308
 $
 $
 $1,308
 
Trading investment securities — The Company’s trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
 
For the three months ended March 31, 2018,2019, and for the year ended December 31, 2017,2018, 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 consolidated balance sheet 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 consolidated balance sheet for the revolving credit facility approximate fair value due to it being variable-rate debt. During the three months ended March 31, 20182019 and 2017,2018, the Company did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

(13)    Revenue Recognition

Adoption of ASU Topic 606

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The Company recorded a net reduction to opening accumulated deficit of $0.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to deferred revenue on shipments that had not been delivered being recognized upon shipment and deferrals for annual membership fees that are no longer deferred. The impact to revenues and operating income as a result of applying Topic 606 was a decrease of $0.5 million and $0.2 million, respectively, for the three months ended March 31, 2018.

Revenue Recognition

Net sales include 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 the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. The Company recognizes revenue by transferring the promised products to the customer, with revenue recognized at shipping point, the point in time the customer obtains control of the products. The majority of the Company'sCompany’s contracts have a single performance obligation and are short term in nature. Contracts with multiple performance obligations are insignificant. Sales taxes and value added taxes in foreign jurisdictions that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. Amounts received for unshipped merchandise are recorded as deferred revenue.

A reserve for product returns is recorded based upon historical experience and current trends. The Company allows independent Managers or Distributors to return the unused portion of products within ninety days of purchase if they are not satisfied with the product. In some of the Company’s markets, the requirements to return product are more restrictive.

From time to time, the Company’s U.S. operations extend short-term credit associated with product promotions. In addition, for certain of the Company’s international operations, the Company offers credit terms consistent with industry standards within the country of operation.

Volume incentives, and other sales incentives or rebates are a significant part of the Company'sCompany’s direct sales marketing program, and represent commission payments made to independent distributors. 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 Managers and Distributors 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.

Contract Liabilities - Customer Loyalty Programs

The Company recordsWe record contract liabilities for loyalty point program in deferred revenue. These programs are accountaccounted for as a reduction in the transaction price and are generally recognized as points are redeemed for additional products.


The following table presents changes in these contract liability balances for the three-month period ended March 31, 20182019 (U.S. dollars in thousands):
March 31,
2018
Outstanding at December 31, 2017$1,126
Outstanding at December 31, 2018$1,079
Increase (decrease) attributed to: 
 
Customer loyalty net deferrals 1,790
1,935
Customer loyalty redemptions (1,445)(1,891)
Outstanding at March 31, 2018$1,471
Outstanding at March 31, 2019$1,123

The table above excludes liability for sales returns, as they are insignificant.

Disaggregation of Revenue

The Company’sOur products are grouped into six principal categories: general health, immune, cardiovascular, digestive, personal care and weight management. The Company hasWe have four business segments that are divided based on the different characteristics of their distributor and customer bases, distributor compensation plans and product formulations. Three business segments operate under the Nature’s Sunshine Products brand and one business segment operates under the Synergy® WorldWide brand. See Note 8,7, Segment Information, for further information on the Company’sour reportable segments and the Company’sour presentation of disaggregated revenue by reportable segment and product category.

Practical Expedients and Exemptions

The Company hasWe have made the accounting policy election to treat shipping and handling as a fulfillment activity rather than a promised service under Topic 606.

The CompanyWe generally expensesexpense volume incentives when incurred because the amortization period would have been one year or less.

All of the Company’sour contracts with customers have a duration of less than one year, the value of any unsatisfied performance obligations is insignificant.


Item 2.                           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 the Company'sour Annual Report on Form 10-K for the year ended December 31, 2017.2018.
 
OVERVIEW
 
The Company isWe are a natural health and wellness company primarily engaged in the manufacturingmanufacture and direct sellingsale of nutritional and personal care products. The Company has four business segments thatWe are divided based on the different characteristicsa Utah corporation with our principal place of their distributor and customer bases, distributor compensation plans and product formulations, as well as the internal organization of its officers and their responsibilities and business operations. Three business segments operate under the Nature’s Sunshine Products brand (NSP Americas; NSP Russia, Central and Eastern Europe; and NSP China), and one business segment operates under the Synergy® WorldWide brand. The NSP Russia, Central and Eastern Europe segment also includes the Company’s wholesale business in which the Company sells its products to various locally-managed entities independent of the Company that the Company has granted distribution rights for the relevant market.

In the fourth quarter of 2017, the Company moved the reporting of its wholesale business, in which the Company sells itsLehi, Utah, and sell our products to a locally managed entitysales force of independent ofdistributors who uses the Company that has distribution rights for the market, from the China and New Markets segmentproducts themselves or resells them to NSP Russia, Central and Eastern Europe segment. The net sales and contribution margin for the three months ended March 31, 2017 were recast to reflect that change.consumers.


The Company’sOur independent distributors market and sell the Company'sour products to customers and sponsor other independent distributors who also market the Company'sour products to customers. The Company's revenue isOur sales are highly dependent upon the number and productivity of itsour 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 its independent distributors. The Company seeksWe seek to motivate and provide incentives to itsour independent distributors by offering high quality products and providing its independent distributors with product support, training seminars, sales conventions, travel programs and financial incentives.

In the first quarter of 2018,2019, the Company experienced an increase in its consolidated net sales of 5.14.5 percent (or 1.47.1 percent in local currencies) compared to the same period in 2017.2018. NSP Russia, Central and Eastern Europe net sales increased approximately 13.118.9 percent (or 20.8 percent in local currencies) compared to the same period in 2018. NSP Americas net sales decreased approximately 7.7 percent compared to the same period in 2017. NSP Americas net sales decreased approximately 6.2 percent compared to the same period in 2017,2018, (or 6.87.0 percent in local currencies). NSP China net sales increased approximately 52.352.4 percent compared to the same period in 20172018 (or 42.561.4 percent in local currencies). Synergy WorldWide net sales increased approximately 16.510.0 percent compared to the same period in 20172018 (or 8.114.7 percent in local currencies). The weakeningstrengthening of the U.S. dollar versus the local currencies, primarily in the Company'sour Asian and European markets, resulted in an approximate 1.4 percent or $3.0a $2.3 million increasedecrease of itsour net sales during the quarter.

The Company made a significant investment in its information systems of approximately $48.0 million from 2013 through 2017, and began the initial implementation of the Oracle ERP system on April 2, 2017, for the Company’s NSP Americas segment as well as other corporate operations. The implementation of the Oracle ERP system negatively impacted net sales and profitability during 2017, primarily by causing wait times for calls into the Company's call center to be longer than usual and by causing difficulties within the Company's on-line product ordering system. While the Company has addressed these issues, customer attrition rates increased.

In absolute terms selling,Selling, general and administrative expenses increased $2.1$1.5 million during the three months ended March 31, 20182019 compared to the same period in 2017, and2018, but as a percentage of net sales decreased towere constant at 37.1 percent from 36.5 percent in 2017.percent. The increase in dollars was primarily the result of Oracle ERP depreciation quarter-over-quarter.restructuring charges of $1.6 million recorded during the period.

The Company distributes itsWe distribute our products to consumers through an independent sales force comprised of independent Managers and Distributors, many of whom also consume the Company'sour products. Typically a person who joins the Company’sour 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 13,70014,000 and 14,90013,700 and active independent Distributors and customers were approximately 224,100232,800 and 234,300224,100 at March 31, 20182019 and 2017,2018, respectively.

As an international business, the Company haswe have significant sales and costs denominated in currencies other than the U. S.U.S. Dollar. Sales in international markets denominated in foreign currencies are expected to continue to represent a substantial portion of the Company'sour sales. Likewise, the Company expects itswe expect foreign markets with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of itsour overall sales and related operating expenses. Accordingly, changes in foreign currency exchange rates could materially affect sales and costs or the comparability of sales and costs from period to period as a result of translating the market'sforeign markets financial statements into itsour reporting currency.


RESULTS OF OPERATIONS
 
The following table summarizes the Company'sour 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, 20182019 and 20172018 (dollar amounts in thousands):
 
Three Months Ended
March 31, 2018
 Three Months Ended
March 31, 2017
 ChangeThree Months Ended
March 31, 2019
 Three Months Ended
March 31, 2018
 Change
Total
dollars
 Percent of
net sales
 Total
dollars
 Percent of
net sales
 Total
dollars
 Percentage Total
dollars
 Percent of
net sales
 Total
dollars
 Percent of
net sales
 Total
dollars
 Percentage 
Net sales$87,342
 100.0 % $83,098
 100.0 % $4,244
 5.1 %$91,272
 100.0 % $87,342
 100.0 % $3,930
 4.5 %
Cost of sales(22,713) (26.0) (21,728) (26.1) (985) (4.5)(23,429) (25.7) (22,713) (26.0) (716) (3.2)
64,629
 74.0
 61,370
 73.9
 3,259
 5.3
Gross Profit67,843
 74.3
 64,629
 74.0
 3,214
 5.0
Volume incentives31,362
 35.9
 28,983
 34.9
 2,379
 8.2
31,013
 34.0
 31,362
 35.9
 (349) (1.1)
SG&A expenses32,386
 37.1
 30,336
 36.5
 2,050
 6.8
33,852
 37.1
 32,386
 37.1
 1,466
 4.5
Operating income881
 1.0
 2,051
 2.5
 (1,170) (57.0)2,978
 3.3
 881
 1.0
 2,097
 238.0
Other income, net740
 0.8
 1,275
 1.5
 (535) (42.0)
Other income (expense), net(48) (0.1) 740
 0.8
 (788) (106.5)
Income before income taxes1,621
 1.9
 3,326
 4.0
 (1,705) (51.3)2,930
 3.2
 1,621
 1.9
 1,309
 80.8
Provision for income taxes1,288
 1.5
 1,463
 1.8
 (175) (12.0)1,201
 1.3
 1,288
 1.5
 (87) (6.8)
Net income$333
 0.4 % $1,863
 2.2 % $(1,530) (82.1)%$1,729
 1.9 % $333
 0.4 % $1,396
 419.2 %
 
Net Sales
 
The Company’s internationalInternational operations have provided, and are expected to continue to provide, a significant portion of itsour total net sales. As a result, total net sales will continue to be affected by fluctuations in the U.S. dollar against foreign currencies. In order to provide a framework for assessing how itsour underlying businesses performed excluding the effect of foreign currency fluctuations, in addition to comparing the percent change in net sales from one period to another in U.S. dollars, it presentswe present net sales excluding the impact of foreign exchange fluctuations, which comparesfluctuations. We compare the percentage change in net sales from one period to another period by excluding the effects of foreign currency exchange as shown below. Net sales excluding the impact of foreign exchange fluctuations is not a U.S. GAAP financial measure and removes from net sales in U.S. dollars the impact of changes in exchange rates between the U.S. dollar and the functional currencies of itsour foreign subsidiaries, by translating the current period net sales into U.S. dollars using the same foreign currency exchange rates that were used to translate the net sales for the previous comparable period. The Company believesWe believe presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of itsour foreign operations from period to period. However, net sales excluding the impact of foreign currency fluctuations should not be considered in isolation or as an alternative to net sales in U.S. dollar measures that reflect current period exchange rates, or to other financial measures calculated and presented in accordance with U.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 7A.3. Quantitative and Qualitative Disclosures about Market Risk.



The following table summarizes the changes in net sales by operating segment with a reconciliation to net sales excluding the impact of currency fluctuations for the three months ended March 31, 20182019 and 20172018 (dollar amounts in thousands): 
Net Sales by Operating SegmentNet Sales by Operating Segment
Three Months Ended
March 31, 2018
 Three Months Ended
March 31, 2017
 Percent
Change
 Impact of
Currency
Exchange
 Percent
Change
Excluding
Impact of
Currency
Three Months Ended
March 31, 2019
 Three Months Ended
March 31, 2018
 Percent
Change
 Impact of
Currency
Exchange
 Percent
Change
Excluding
Impact of
Currency
NSP Americas: 
  
  
  
  
 
  
  
  
  
NSP North America$35,605
 $38,046
 (6.4)% $128
 (6.8)%$33,595
 $35,605
 (5.6)% $(134) (5.3)%
NSP Latin America6,267
 6,599
 (5.0) 128
 (7.0)5,072
 6,267
 (19.1) (124) (17.1)
41,872
 44,645
 (6.2) 256
 (6.8)38,667
 41,872
 (7.7) (258) (7.0)
NSP Russia, Central and Eastern Europe9,551
 8,446
 13.1
 236
 10.3
11,358
 9,551
 18.9
 (181) 20.8
Synergy WorldWide: 
  
  
  
  
 
  
  
  
  
Synergy Asia Pacific23,707
 18,781
 26.2
 1,531
 18.1
27,344
 23,707
 15.3
 (1,103) 20.0
Synergy Europe5,656
 5,925
 (4.5) 754
 (17.3)4,723
 5,656
 (16.5) (387) (9.7)
Synergy North America2,454
 2,607
 (5.9) 
 (5.9)2,927
 2,454
 19.3
 
 19.3
31,817
 27,313
 16.5
 2,285
 8.1
34,994
 31,817
 10.0
 (1,490) 14.7
NSP China4,102
 2,694
 52.3
 264
 42.5
6,253
 4,102
 52.4
 (366) 61.4
$87,342
 $83,098
 5.1 % $3,041
 1.4 %$91,272
 $87,342
 4.5 % $(2,295) 7.1 %
 
Consolidated net sales for the three months ended March 31, 2018,2019, were $87.3$91.3 million compared to $83.1$87.3 million for the same period in 2017,2018, or an increase of approximately 5.14.5 percent. The increase was primarily related to product sales in NSP China, growth in NSP Russia, Central and Eastern Europe, and continued growth in Synergy Asia. Growth in these markets was offset by declines in the NSP Americas markets and Synergy Europe markets. Excluding the favorableunfavorable impact of foreign currency exchange rate fluctuations, the Company'sour consolidated net sales would have increased 1.47.1 percent from 2017.the same period in 2018.

NSP Americas
 
Net sales related to NSP Americas for the three months ended March 31, 2018,2019, were $41.9$38.7 million, compared to $44.6$41.9 million for the same period in 2017,2018, or a decrease of 6.27.7 percent. In local currency, net sales decreased 6.87.0 percent, compared to the same period in 2017. Net sales declined primarily due to interruptions in customer service associated with2018. The declines for the implementation of the Oracle ERP system, which began in the Company's NSP America's segment at the beginning of the second quarter of 2017, which caused disruption in the Company's call center and online product ordering system. While the Company has addressed these issues, customer attrition rates increased. As a result, the Company believes the baseline in NSP Americas has been set at a lower level.business are further discussed in United States and Latin America commentary below. Active independent Managers within NSP Americas totaled approximately 6,200 and 6,500 and 7,300 at each of March 31, 20182019 and 2017,2018, respectively. Active independent Distributors and customers within NSP Americas totaled approximately at104,100 and 107,700 and 123,500 at March 31, 2019 and 2018, respectively. Our decrease in Distributor recruiting and 2017, respectively. The issues associated withretention in the implementation of the Oracle ERP system negatively impacted the Company's ability to attract new Distributors and customers, and retain existing Distributors and customers, which was a significant cause for the decreaseU.S. resulted in decline in the number of our independent Managers, Distributors and customers. Independent Managers were down 8.1customers by 3.3 percent and active independent Distributors and customers were down 4.44.6 percent, respectively, compared to the prior year.

Notable activity in the following markets contributed to the results of NSP Americas:
 
In the United States, net sales decreased approximately $2.4$1.7 million, or 6.75.3 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. The decrease was primarilydecline in the market is mainly due to the issues associateda decrease in Distributor recruiting and retention. We continue to work with the implementation of the Oracle ERP systemleaders in the Company's NSP Americas segment at the beginning the second quarter of 2017, which has continuedU.S. to impact net sales.improve recruiting and retention results.

In Latin America, net sales decreased approximately $0.3$1.2 million, or 5.019.1 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. In local currency, net sales decreased 7.017.1 percent compared to the same period in 2017.2018. Currency devaluation had a $0.1 million unfavorable impact on net sales for the three months ended March 31, 2018.2019. The decreasedecline in net sales was primarilythe market is mainly due to the issues associated with the implementation of the Oracle ERP systemdecreases in the Company's NSP Americas segment at the beginning of the second quarter of 2017, which has continued to impact net sales. Net

sales has also been impacted by the closure of the the NicaraguaDistributor retention and Costa Rica markets during the fourth quarter of 2017 as well as continued challenges from changing regulations for product registration that affect the Company’s ability to sell some of its products in Latin America.average purchase size.

NSP Russia, Central and Eastern Europe
 
Net sales related to NSP Russia, Central and Eastern Europe markets (primarily Russia, the Ukraine, Poland, and Belarus), for the three months ended March 31, 2018,2019, were $9.6$11.4 million, compared to $8.4$9.6 million for the same period in 2017,2018, an increase of 13.118.9 percent. The functional currency for most of these markets is the U.S. Dollar which reduces the effect from foreign currency fluctuations. Fluctuations in foreign exchange rates had a $0.2 million unfavorable impact on net sales

for the three months ended March 31, 2019. Net sales increased primarily as a result of the relative stabilization of the Russian ruble against the U.S. dollar and product promotions that have improved distributor engagement. Active independent Managers within NSP Russia, Central and Eastern Europe totaled approximately 3,5003,800 and 3,1003,500 at March 31, 20182019 and 2017,2018, respectively. Active independent Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 69,10079,000 and 64,70069,100 at March 31, 2019 and 2018, and 2017, respectively. Net sales increased primarily as a result of the relative stabilization of Russian ruble against the U.S. dollar and product promotions that have improved distributor engagement.
 
Synergy WorldWide
 
Synergy WorldWide reported net sales for the three months ended March 31, 2018,2019, of $31.8$35.0 million, compared to $27.3$31.8 million for the same period in 2017,2018, an increase of 16.510.0 percent. The increase was primarily due to local currency sales increases in the Company's Korean and Japanese markets, and the favorable fluctuationsFluctuations in foreign exchange rates which had a $2.3$1.5 million favorableunfavorable impact on net sales for the three months ended March 31, 2018.2019. Excluding the impact of fluctuations in foreign exchange rates, local currency net sales in Synergy WorldWide would have increased by 8.114.7 percent from the same period in 2017.2018. The increase for the Synergy Worldwide business is further discussed below. Active independent Managers within Synergy WorldWide totaled approximately 3,7004,000 and 4,5003,700 at March 31, 20182019 and 2017,2018, respectively. Active independent Distributors and customers within Synergy WorldWide totaled approximately 47,30049,700 and 46,10047,300 at March 31, 2019 and 2018, and 2017, respectively. Synergy WorldWide’s business model is operating under a traditional direct selling approach.
 
Notable activity in the following markets contributed to the results of Synergy WorldWide:
 
In South Korea, net sales increased $3.2$3.9 million, or 28.527.0 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. In local currencies, net sales increased 19.333.3 percent compared to the same period in 2017.2018. The increase in local currency net sales was the result of an increased distributor involvement and focus on core products for the market as well as an easing of geopolitical tension and an improvement in economic conditions that unfavorably impacted the prior year.market.

In Japan, net sales increased approximately $1.2$0.4 million, or 32.58.2 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. In local currencies, net sales increased 26.110.0 percent compared to the same period in 2017. The Company attributes2018. We attribute the increase in net sales in Japan primarily to the introduction of new products and the implementation of programs intended to stimulate activity including the adoption of Korea's distributor recognition program last year, which continued to drivehad a positive impact on market sales improvements in the first quarter of 2018.volume.

In Europe, net sales decreased approximately $0.3$0.9 million, or 4.516.5 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. In local currency net sales decreased 17.39.7 percent compared to the same period in 2017.2018. The decrease in local currency net sales is primarily due to market saturationa decrease in Distributor recruiting and retention in certain European countries and a reduction in sales activity in the market's Scandinavian countries.

In North America, net sales decreasedincreased approximately $0.2$0.5 million, or 5.919.3 percent, for the three months ended March 31, 2018,2019, compared to the same period in 2017.2018. The declineincrease in sales is primarily driven by lower Distributor recruiting. Growthgrowth initiatives have been developed and implemented to more effectively support recruiting and Distributor training and motivation.

NSP China
 
NSP China had net sales for the three months ended March 31, 2018,2019, of $4.1$6.3 million, compared to $2.7$4.1 million for the same period in 2017,2018, an increase of 52.352.4 percent. NetFluctuations in foreign exchange rates had $0.4 million unfavorable impact on net sales were positively impacted byfor the Company receiving its direct selling license in May 2017, which allowsthree months ended March 31, 2019. In local currency, net sales increased 61.4 percent for the Companythree months ended March 31, 2019, compared to expand its business scope to include direct selling activities within China.2018. NSP China continues to show growth primarily due to effortsinitiatives designed to increase distributorindependent service providers’ engagement levels and gain market share.

Further information related to NSP Americas, NSP Russia, Central and Eastern Europe, Synergy WorldWide, and NSP China business segments is set forth in Note 7 to the Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this report.
 

Cost of Sales
 
Cost of sales as a percent of net sales decreased to 26.025.7 percent for the three months ended March 31, 2018,2019, compared to 26.126.0 percent for the same period in 2017.2018. The decrease in cost of sales percentage is driven by favorable changes in market mix.
 

Volume Incentives
 
Volume incentives areas a significant partpercent of net sales decreased to 34.0 percent for the Company's direct sales marketing program, and represent commission payments madethree months ended March 31, 2019, compared to independent distributors.35.9 percent in 2018. These payments are designed to provide incentives for reaching higher sales levels. Volume incentives vary slightly, on a percentage basis, by product due to pricing policies and commission plans in place in the various operations.

Volume incentives as a percent of net sales increased to 35.9 percent for the three months ended March 31, 2018, compared to 34.9 percent in 2017. The change in We do not pay volume incentives as a percentage of net sales is due primarily to increased rates in certain markets resulting from increased promotional activity during the period. The Company has also noted an increaseChina, instead we pay independent service fees, which are included in sales in markets where volume incentives are a higher percentage of net sales.selling, general and administrative expenses. Volume incentives as a percentage of net sales can fluctuate based on promotional activity and mix of sales by market.

Selling, General and Administrative
 
Selling, general and administrative expenses represent operating expenses, components of which include payroll and benefits, sales events, professional fees, travel and entertainment, marketing, occupancy costs, communication costs, bank fees, depreciation and amortization, independent service fees in China, and other miscellaneous operating expenses.

Selling, general and administrative expenses increased by approximately $2.1$1.5 million to $32.4$33.9 million for the three months ended March 31, 2018.2019. Selling, general and administrative expenses were 37.1 percent of net sales for the three months ended March 31, 2018,2019, compared to 36.537.1 percent for the same period in 2017.2018.

The increase in selling, general and administrative expenses for the three months ended March 31, 2018,2019, was primarily related to $1.2$1.6 million of increased depreciationU.S. restructuring related to Oracle.costs.

 
Other Income (Expense), Net
 
Other income (expense) net, for the three months ended March 31, 2018,2019, decreased $0.5 million to $0.7$0.8 million as compared to the same period in 2017.2018. Other income for the three months ended March 31, 2018,2019, primarily consisted of foreign exchange gains.losses.
 
Income Taxes
 
For the three months ended March 31, 2019 and 2018, and 2017, the Company’sour provision for income taxes, as a percentage of income before income taxes was 79.541.0 percent and 44.079.5 percent, respectively, compared with U.S. federal statutory rates of 21.0 percent and 35.0 percent, respectively.percent.
 
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2018,2019, was primarily attributed to current year foreign losses primarily related to China, that presently do not provide future tax benefit, as well as net unfavorable foreign items.
 
The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended March 31, 2017,2018, was primarily attributed to current year foreign losses in the period, primarily related to China, that presently dodid not provide future tax benefit, and an adjustment of a prior year deferred tax asset related toas well as net unfavorable foreign currency translation amounts offset by net favorable foreign items related to tax rate differences.items.

The Company’sOur U.S. federal income tax returns for 20142015 through 2016,2017, are open to examination for federal tax purposes. The Company hasWe have several foreign tax jurisdictions that have open tax years from 20112012 through 2017.2018.
 
As of March 31, 20182019 and December 31, 2017, the Company2018, we had accrued $4.7$2.1 million and $4.6$2.2 million, respectively, related to unrecognized tax positions. This net increasedecrease was primarily attributed to increasesdecreases in transfer pricingforeign tax contingencies.


Product Categories
 
The Company’sOur line of over 700 products includes several different product classifications, such as immune, cardiovascular, digestive, personal care, weight management and other general health products. The Company purchasesWe purchase herbs and other raw materials in bulk and, after rigorous quality control testing, it formulates, encapsulates, tabletswe formulate, encapsulate, tablet or concentratesconcentrate them, labelslabel and packagespackage them for shipment. Most of our products are manufactured at the Company'sour facility in Spanish Fork, Utah. Contract manufacturers produce some of the Company'sour products in accordance with the Company's exactingour specifications and standards. The Company hasWe have implemented stringent quality control procedures to verify that itsour contract manufacturers have complied with itsour specifications and standards.

Presented below areSee Note 7, Segment Information, for a summary of the U.S. dollar amounts and associated revenue percentages from the sale of general health, immune, cardiovascular, digestive, personal care and weight management products for the three months ended March 31, 20182019 and 2017,2018, by business segment.

Three Months Ended March 31,2018 2017
NSP Americas: 
  
  
  
General health$17,746
 42.4% $19,866
 44.5%
Immune5,544
 13.2
 5,073
 11.4
Cardiovascular3,100
 7.4
 3,316
 7.4
Digestive11,712
 28.0
 12,148
 27.2
Personal care1,825
 4.4
 1,886
 4.2
Weight management1,945
 4.6
 2,356
 5.3
Total NSP Americas41,872
 100.0
 44,645
 100.0
        
NSP Russia, Central and Eastern Europe: 
  
  
  
General health$4,131
 43.3% $3,943
 46.7%
Immune1,029
 10.8
 862
 10.2
Cardiovascular695
 7.3
 595
 7.0
Digestive2,431
 25.5
 2,088
 24.7
Personal care960
 10.1
 642
 7.6
Weight management305
 3.2
 316
 3.7
Total NSP Russia, Central and Eastern Europe9,551
 100.0
 8,446
 100.0
        
Synergy WorldWide: 
  
  
  
General health$8,640
 27.2% $6,687
 24.5%
Immune149
 0.5
 121
 0.4
Cardiovascular13,330
 41.9
 11,103
 40.7
Digestive3,825
 12.0
 3,465
 12.7
Personal care2,140
 6.7
 2,067
 7.6
Weight management3,733
 11.7
 3,870
 14.2
Total Synergy WorldWide31,817
 100.0
 27,313
 100.0
        
NSP China: 
  
  
  
General health$343
 8.4% $495
 18.4%
Immune146
 3.6
 47
 1.7
Cardiovascular561
 13.7
 517
 19.2
Digestive2,456
 59.9
 1,431
 53.1
Personal care253
 6.2
 42
 1.6
Weight management343
 8.4
 162
 6.0
Total NSP China4,102
 100.0
 2,694
 100.0
        
Consolidated: 
  
  
  
General health$30,860
 35.3% $30,991
 37.3%
Immune6,868
 7.9
 6,103
 7.3
Cardiovascular17,686
 20.2
 15,531
 18.7
Digestive20,424
 23.4
 19,132
 23.0
Personal care5,178
 5.9
 4,637
 5.6
Weight management6,326
 7.2
 6,704
 8.1
Total Consolidated$87,342
 100.0% $83,098
 100.0%



Distribution and MarketingSelling
 
The Company’sOur independent distributors, also known as Managers and Distributors, market itsmarkets our products to customers through direct selling techniques and sponsor other independent distributors who also market the Company'sour products to customers. The Company seeksWe seek to motivate and provide incentives to itsour independent distributors by offering high quality products and providing its independent distributors with product support, training seminars, sales conventions, travel programs and financial incentives.

The Company’sOur products sold in the United States are shipped directly from itsour manufacturing and warehouse facilities located in Spanish Fork, Utah, as well as from itsour regional warehouses located in Georgia, Ohio and Texas. Many of the Company'sour international operations maintain warehouse facilities withand inventory to supply their independent distributorsManagers, Distributors and customers. However, in foreign markets where the Company doeswe do not maintain warehouse facilities, it haswe have contracted with third-parties to distribute itsour products and provide support services to itsour independent sales force of independent distributors.Managers and Distributors.

As of March 31, 2018, the Company2019, we had approximately 224,100232,800 "active independent Distributors and customers" (as defined below). A person who joins the Company’sour independent sales force begins as an independent distributor. Many independent distributors sell the Company’sour products on a part-time basis to friends or associates or use the products themselves. An independent distributor may earn Manager status by attaining certain product sales levels. As of March 31, 2018, the Company2019, we had approximately 13,70014,000 "active independent Managers" (as defined below) worldwide. In many of the Company'sour markets, itsour independent Managers and Distributors are primarily retailers of the Company'sour products, including practitioners, proprietors of retail stores and other health and wellness specialists.

In the United States, the Companywe generally sells itssell our products on a cash or credit card basis. From time to time, the Company'sour U.S. operations extend short-term credit associated with product promotions. For certain of itsour international operations, the Company useswe use independent distribution centers and offersoffer credit terms that are generally consistent with industry standards within each respective country.
 
Other than in its NSP China segment, the Company paysWe pay sales commissions, or “volume incentives” to itsour independent Managers and Distributors based upon their own product sales and the amountproduct sales of their sales group product purchases.organization. As an exception, in NSP China, we do not pay volume incentives; rather, we pay independent service fees, which are included in selling, general and administrative expense. These volume incentives are recorded as an expense in the year earned. The amounts of volume incentives that the Companywe expensed during the quarters ended March 31, 20182019 and 2017,2018, are set forth in the Condensed Consolidated Financial Statements in Item 1 of this report. In addition to the opportunity to receive volume incentives, independent Managers who attain certain levels of monthly product sales are eligible for additional incentive programs including automobile allowances, sales convention privileges and travel awards. In China, the Company sells its product through independent service providers, whom the Company compensates for marketing, sales support and other services.
 
Distributor Information
 
The Company'sOur revenue is highly dependent upon the number and productivity of itsour independent Managers and Distributors. Growth in sales volume requires an increase in the productivity and/or growth in the total number of independent Managers and Distributors.

Within the Company, there are a number of different distributor compensation plans and qualifications, which generate active independent Managers and Distributors with different sales values in theour different business segments. Within Synergy WorldWide, the sales qualifications required for active independent Managers and Distributors varies by market according to local economic factors. As sales grow in markets with higher qualification values, and decline in those with lower qualification values, the resultant mix change influences the active counts for independent ManagerManagers and Distributor counts.Distributors. As a result, from time-to-time, changes in overall active counts for independent ManagerManagers and Distributor countsDistributors may not be indicative of actual sales trends for the segment.

In China, the Company doeswe do not sell itsour products through Managers and Distributors, but rather through independent service providers who are compensated for marketing, sales support, and other services.


The following table provides information concerning the number of total independent Managers, Distributors and customers by segment, as of the dates indicated:
 
Total Managers, Distributors and Customers by Segment as of March 31,
 
2018 20172019 2018
Distributors
& Customers
 Managers Distributors
& Customers
 ManagersDistributors
& Customers
 Managers Distributors
& Customers
 Managers
NSP Americas226,700
 6,500
 263,700
 7,300
215,500
 6,200
 226,700
 6,500
NSP Russia, Central and Eastern Europe140,700
 3,500
 139,800
 3,100
154,200
 3,800
 140,700
 3,500
Synergy WorldWide109,700
 3,700
 115,200
 4,500
110,400
 4,000
 109,700
 3,700
477,100
 13,700
 518,700
 14,900
480,100
 14,000
 477,100
 13,700
 
“Total Managers” includes independent Managers under the Company'sour various compensation plans that have achieved and maintained specified and personal groups sale volumes as of the datedates indicated. To maintain Manager status, an individual must continue to meet certain product sales volume levels. As such, all Managers are considered to be “Active Managers”.

“Total Distributors and customers” includes the Company'sour independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous twelve months ended as of the datedates indicated. This includes independent Manager, Distributor and customer accounts that may have become inactive since such respective dates.
 
The following table provides information concerning the number of active Distributors and customers by segment, as of the dates indicated:
 
Active Distributors and Customers by Segment as of March 31,
 
2018 20172019 2018
Distributors
& Customers
 Managers Distributors
& Customers
 ManagersDistributors
& Customers
 Managers Distributors
& Customers
 Managers
NSP Americas107,700
 6,500
 123,500
 7,300
104,100
 6,200
 107,700
 6,500
NSP Russia, Central and Eastern Europe69,100
 3,500
 64,700
 3,100
79,000
 3,800
 69,100
 3,500
Synergy WorldWide47,300
 3,700
 46,100
 4,500
49,700
 4,000
 47,300
 3,700
224,100
 13,700
 234,300
 14,900
232,800
 14,000
 224,100
 13,700
 
“Active Distributors and customers” includes the Company'sour independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months ended as of the datedates indicated.
 
The following tables provide information concerning the number of new independent Managers, Distributors and customers by segment, for the periods indicated:
 
New Managers, Distributors and Customers by Segment for the Quarter Ended March 31,
 
2018 20172019 2018
Distributors
& Customers
 Managers Distributors
& Customers
 ManagersDistributors
& Customers
 Managers Distributors
& Customers
 Managers
NSP Americas21,700
 800
 28,300
 1,100
23,900
 500
 21,700
 800
NSP Russia, Central and Eastern Europe10,500
 200
 12,900
 200
18,300
 300
 10,500
 200
Synergy WorldWide15,600
 800
 11,200
 700
17,500
 800
 15,600
 800
47,800
 1,800
 52,400
 2,000
59,700
 1,600
 47,800
 1,800
 
“New Managers” includes independent Managers under the Company'sCompany’s various compensation plans that first achieved the rank of Manager during the previous three months ended as of the date indicated.

“New Distributors and Customers” include the Company'sCompany’s independent Distributors and customers who have made their initial product purchase directly from the Company for resale and/or personal consumption during the previous three months ended as of the date indicated.

The following tables provide information concerning the number of new Managers, Distributors and customers by segment, for the periods indicated:
 
New Managers, Distributors and Customers by Segment for the Twelve Months Ended March 31,
 
2018 20172019 2018
Distributors
& Customers
 Managers Distributors
& Customers
 ManagersDistributors
& Customers
 Managers Distributors
& Customers
 Managers
NSP Americas78,200
 2,300
 113,700
 3,600
82,700
 1,900
 78,200
 2,300
NSP Russia, Central and Eastern Europe38,200
 700
 46,600
 600
60,000
 1,000
 38,200
 700
Synergy WorldWide67,900
 2,900
 66,200
 3,100
70,400
 3,200
 67,900
 2,900
184,300
 5,900
 226,500
 7,300
213,100
 6,100
 184,300
 5,900
 
“New Managers” includes independent Managers under the Company'sour various compensation plans that first achieved the rank of Manager during the previous twelve months ended as of the datedates indicated.

“New Distributors and Customers” include the Company'sour independent Distributors and customers who have made their initial product purchase directly from the Company for resale and/or personal consumption during the previous twelve months ended as of the datedates indicated.

LIQUIDITY AND CAPITAL RESOURCES
 
The Company'sOur principal use of cash is to pay for operating expenses, including volume incentives, inventory and raw material purchases, capital assets and funding of international expansion. As of March 31, 2018,2019, working capital was $46.2$41.0 million, compared to $48.9$40.1 million as of December 31, 2017.2018. At March 31, 2018, the Company2019,we had $42.3$45.4 million in cash and cash equivalents, of which $35.7$37.4 million was held in foreign markets and may be subject to various withholding taxes and other restrictions related to repatriation before becoming available to be used along with the normal cash flows from operations to fund any unanticipated shortfalls in future cash flows.
 
The Company'sOur net consolidated cash inflows (outflows) are as follows (in thousands):
 
Three Months Ended March 31,Three Months Ended March 31,
2018 20172019 2018
Operating activities$3,714
 $774
$(4,609) $3,714
Investing activities(489) (2,189)(387) (489)
Financing activities(5,194) 943
(189) (5,194)
 
Operating Activities
 
For the three months ended March 31, 2018,2019, operating activities providedused cash in the amount of $3.7$4.6 million, compared to cash provided in the amount of $0.8$3.7 million for the same period in 2017.2018. Operating cash flows increaseddecreased due to the timing of payments and receipts for accounts receivable, inventory, accounts payable, and accrued liabilities. Those increases were partially offset by the timing of payments and receipts forliabilities, accrued volume incentives and service fees, and deferred revenue.income taxes payable.

Investing Activities
 
For the three months ended March 31, 2018,2019, investing activities used cash in the amount of $0.5$0.4 million, compared to $2.2$0.5 million for the same period in 2017.2018. Capital expenditures related to the purchase of equipment, computer systems and software for the three months ended March 31, 2019 and 2018, were $0.4 million and 2017, were $0.5 million, and $2.7 million, respectively. The decrease

in purchases was primarily due to the launch of Oracle in the second quarter of 2017, significantly reducing the Company's ongoing capital expenditures.

Financing Activities
 
For the three months ended March 31, 2018,2019, financing activities used cash in the amount of $5.2$0.2 million, compared to cash providedused in the amount of $0.9$5.2 million for the same period in 2017. During2018. For the three months ended the Company used $5.5 millionMarch 31, 2019, we had $0 net borrowings due to pay down its outstanding line of credit versus borrowing $3.3 million duringimprovements in our overall cash position compared to the same period in 2017.

The Company's joint venture in China borrowed $0.5 million during2018. In the periodthree months ended March 31, 2018, from the Company's joint venture partner. This note is payable in one year and bears interestwe made principal payments of 3.0 percent.$5.5 million.

During the three months ended March 31, 2017, the Company used cash to pay dividends2019 and 2018, our joint venture in an aggregate amountChina borrowed $0 and $0.5 million from our joint venture partner, respectively. These notes are payable in one year and bear interest of $1.9 million.3.0 percent.

On July 11, 2017, the Companywe 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 “Bank of America Credit“Credit Agreement”). In connection with the closing of the Bank of America Credit Agreement, the Company terminated its revolving credit agreement with Wells Fargo Bank, N.A. (the "Wells Fargo Credit Agreement") and satisfied in full the outstanding balance thereof through borrowings on the Bank of America Credit Agreement. The Company paysWe pay interest on any borrowings under the Bank of America Credit Agreement at LIBOR plus 1.25 percent (3.13(3.74 percent and 2.823.73 percent as of March 31, 20182019 and December 31, 2017,2018, respectively), an annual commitment fee of 0.2 percent on the unused portion of the commitment. The Company isWe are required to settle itsour net borrowings under the Bank of America Credit Agreement only upon maturity, and, as a result, hashave classified itsour outstanding borrowings as non-current on itsour condensed consolidated balance sheet as of March 31, 20182019 and December 31, 2017.2018. At March 31, 20182019 and December 31, 2017, the Company2018, we had a balance of and $7.7 million and $13.2 million, respectively,no outstanding amounts under the Bank of America Credit Agreement. The Company was in compliance with the debt covenants set forth in the Bank of America Credit Agreement as of March 31, 2018.

The Bank of America Credit Agreement contains customary financial covenants, including financial covenants relating to the Company’sour solvency, leverage, and minimum EBITDA. In addition, the Bank of America 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 Bank of America Credit Agreement. The Bank of America Credit Agreement is collateralized by the Company'sour manufacturing facility, accounts receivable balance, inventory balance and other assets. Effective June 30, 2018, the Company and Bank of America amended the Credit Agreement to modify certain financial covenants. As of March 31, 2019, we were in compliance with the debt covenants set forth in the Credit Agreement.

The Company believesWe believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund itsour normal operating needs, including capital expenditures.expenditures, on both a short- and long-term basis. However, among other things, a prolonged economic downturn, a decrease in demand for the Company'sour products, an unfavorable settlement of itsour unrecognized tax positions or non-income tax contingencies could adversely affect the Company'sour long-term liquidity.

OFF-BALANCE SHEET ARRANGEMENTS
 
The Company hasWe have no off-balance sheet arrangements other than operating leases. The Company does not believe that these operating leases are material to its current or future financial position, results of operations, revenues or expenses, cash flows, capital expenditures or capital resources.arrangements.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
The Company's unauditedOur consolidated financial statements have been prepared in accordance with U.S. GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires the Companyus to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, the Company evaluates itswe evaluate our estimates and assumptions. It bases itsWe base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on the Company'sour financial position and results of operations. Management hasWe have discussed the development, selection and disclosure of these estimates with the Board of Directors and itsour Audit Committee.
 

A summary of the Company'sour significant accounting policies is provided in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2017. The Company believes2018. We believe the critical accounting policies and estimates described below reflect theour more significant estimates and assumptions used in the preparation of itsthe consolidated financial statements. The impact and any associated risks on itsour business that are related to these policies are also discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results.

Revenue Recognition

See discussionOur revenue recognition practices are discussed in financial noteNote 13,Revenue Recognition, to our Condensed Consolidated Financial Statements in Item 1, Part 1 of this report.


Accounts Receivable Allowances
 
Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical trends and management’sour evaluation of the financial condition of the customer. This reserve is adjusted periodically as information about specific accounts becomes available.
  
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'sour assumptions, additional inventory adjustments could be required.
 
Self-Insurance Liabilities
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 have secured commercial insurance for product liability related claims.

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.

Impairment of Long-Lived Assets
 
The Company reviews itsWe 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. ItWe may 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 are recoverable. An impairment loss is calculated by determining the difference between the carrying values and the fair values of these assets.

Incentive Trip Accrual
 
The Company accruesWe accrue for expenses associated with itsour direct sales program, which rewards independent Managers and Distributors with paid attendance for incentive trips, including Companyour conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. ItWe specifically analyzes 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.
  
Contingencies
 
The Company isWe 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 with a range, it records itswe record our best estimate within the range related to the contingency. If there is no best estimate, it recordswe record the minimum of the range. As additional information becomes available, it assesseswe assess the potential liability related to the contingency and revisesrevise the estimates. Revision in estimates of the potential liabilities could materially affect itsour results of operations in the period of adjustment. The Company'sOur contingencies are discussed in further detail in Note 10, “Commitments and Contingencies”, to the Notes of itsour Condensed Consolidated Financial Statements, of Item 1, Part 1 of this report.


Income Taxes
 
The Company’sOur income tax expense, deferred tax assets and liabilities and contingent reserves reflect management’s best assessment of estimated future taxes to be paid. It is subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the Company’sour consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’sour ability to recover its deferred tax assets, management considers 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, the Company developswe 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 that the Company iswe are using to manage the underlying businesses. Valuation allowances are recorded as reserves against net deferred tax assets by the Companyus when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’sour results of operations, cash flows or financial position.

The calculation of the Company’sour tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across itsour global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

Share-Based Compensation
 
The Company recognizesWe recognize all share-based payments to the Board of Directors and employees, including grants of stock options and restricted stock units, to be recognized in the statement of operations based on their grant-date fair values. It recordsWe record compensation expense over the vesting period of the stock options based on the fair value of the stock options on the date of grant.


Item 3           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company conductsWe conduct business in several countries and intends to continueintend to grow itsour international operations. Net sales, operating income and net income are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, itsour operations are exposed to risks associated with changes in social, political and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where it haswe have operations, as well as, to a lesserlessor extent, changes in U.S. laws and regulations relating to international trade and investment.
Foreign Currency Risk
During the three months ended March 31, 2018, approximately 59.0 percent For further information, see Part II, Item 7A of the Company's net sales and approximately 56.7 percent of its operating expenses were realized outside of the United States. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is generally the functional currency. The Company conducts business in multiple currencies with exchange rates that are notour Annual Report on a one-to-one relationship with the U.S. dollar. All revenues and expenses are translated at average exchange ratesForm 10-K for the periods reported. Therefore, its operating results will be positively or negatively affected by a weakening or strengthening of the U.S. dollar in relation to another fluctuating currency. Given the uncertainty and diversity of exchange rate fluctuations, the Company cannot estimate the effect of these fluctuations on its future business, product pricing, results of operations or financial condition, but it has provided consolidated sensitivity analyses below of functional currency/reporting currency exchange rate risks. Changes in various currency exchange rates affect the relative prices at which it sells its products. The Company regularly monitors its foreign currency risks and periodically takes measures to reduce the risk of foreign exchange rate fluctuations on its operating results. The Company does not use derivative instruments for hedging, trading or speculating on foreign exchange rate fluctuations. Additional discussion of the impact on the effect of currency fluctuations has been included in its "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part I, Item 2 of this report.year ended December 31, 2018.

The following table sets forth a composite sensitivity analysis of the Company’s net sales, costs and expenses and operating income in connection with the strengthening of the U.S. dollar (its reporting currency) by 10%, 15%, and 25% against every other fluctuating functional currency in which it conducts business. The Company notes that its individual net sales, cost and expense components and its operating income were equally sensitive to increases in the strength of the U.S. dollar against every other fluctuating currency in which it conducts business.
Exchange rate sensitivity for the three months ended March 31, 2018 (dollar amounts in thousands)
   With Strengthening of U.S. Dollar by:
   10% 15% 25%
   ($) (%) ($) (%) ($) (%)
Net sales$87,342
 $(3,766) (4.3)% $(5,403) (6.2)% $(8,284) (9.5)%
              
Cost and expenses 
  
  
  
  
  
  
Cost of sales22,713
 (1,147) (5.0) (1,646) (7.2) (2,523) (11.1)
Volume incentives31,362
 (1,497) (4.8) (2,149) (6.9) (3,294) (10.5)
Selling, general and administrative32,386
 (977) (3.0) (1,401) (4.3) (2,149) (6.6)
              
Operating income$881
 $(145) (16.5)% $(207) (23.5)% $(318) (36.1)%
Certain of the Company’s operations, including Russia and Ukraine, are served by a U.S. subsidiary through third-party entities, for which all business is conducted in U.S. dollars. Although changes in exchange rates between the U.S. dollar and the Russian ruble or the Ukrainian hryvnia do not result in currency fluctuations within its financial statements, a weakening or strengthening of the U.S. dollar in relation to these other currencies can significantly affect the prices of its products and the purchasing power of its independent Managers, Distributors and customers within these markets. As a result of the current tension between Russia and Ukraine, economic pressures resulting from lower oil prices, and resultant government sanctions, the Russian ruble and the Ukrainian hryvnia have weakened significantly against the U.S. dollar, impacting net sales in this market. Should the conflict continue to escalate, exchanges rates for the Russian ruble and the Ukrainian hryvnia could weaken further against the U.S. dollar, further impacting net sales in these markets.

The following table sets forth a composite sensitivity analysis of the Company’s financial assets and liabilities by those balance sheet line items that are subject to exchange rate risk, together with the total gain or loss from the strengthening of the U.S. dollar in relation to its various fluctuating functional currencies. The sensitivity of its financial assets and liabilities, taken by balance sheet line items, is somewhat less than the sensitivity of its operating income to increases in the strength of the U.S. dollar in relation to other fluctuating currencies in which it conducts business.

Exchange rate sensitivity of the Balance Sheet financial instruments as of March 31, 2018, (dollar amounts in thousands).
   With Strengthening of U.S. Dollar by:
   10% 15% 25%
   ($) (%) ($) (%) ($) (%)
Financial Instruments Included in Current Assets Subject to Exchange Rate Risk 
  
  
  
  
  
  
Cash and cash equivalents$42,303
 $(3,129) (7.4)% $(4,489) (10.6)% $(6,884) (16.3)%
Accounts receivable, net8,259
 (416) (5.0) (597) (7.2) (915) (11.1)
              
Financial Instruments Included in Current Liabilities Subject to Exchange Rate Risk 
  
  
  
  
  
  
Accounts payable5,143
 (111) (2.2) (159) (3.1) (244) (4.7)
              
Net Financial Instruments Subject to Exchange Rate Risk$45,419
 $(3,434) (7.6)% $(4,927) (10.8)% $(7,555) (16.6)%
The following table sets forth the local currencies other than the U.S. dollar in which the Company’s assets that are subject to exchange rate risk were denominated as of March 31, 2018, and exceeded $1.0 million upon translation into U.S. dollars. None of its liabilities that are denominated in a local currency other than the U.S. dollar and that are subject to exchange rate risk exceeded $1.0 million upon translation into U.S. dollars. The Company uses the spot exchange rate for translating balance sheet items from local currencies into its reporting currency. The respective spot exchange rate for each such local currency meeting the foregoing thresholds is provided in the table as well.
Translation of Balance Sheet Amounts Denominated in Local Currency as of March 31, 2018 (dollar amounts in thousands) is as follows:
  Translated into U.S.
Dollars
 At Spot Exchange Rate
per One U.S. Dollar as
of March 31, 2018
Cash and cash equivalents  
  
South Korea (Won) $9,794
 1,061.9
Hong Kong (Dollar) 5,665
 0.8
European Markets (Euro) 3,004
 106.2
Japan (Yen) 2,576
 7.8
China (Yuan Renminbi) 1,631
 6.3
Malaysia (Ringgit) 1,509
 3.9
Poland (Zloty) 1,376
 3.4
Canada (Dollar) 1,261
 1.3
Thailand (Baht) 1,046
 31.2
Other 6,556
 Varies
Total foreign denominated cash and cash equivalents 34,418
  
U.S. dollars held by foreign subsidiaries 1,255
  
Total cash and cash equivalents held by foreign subsidiaries $35,673
  
Finally, the following table sets forth the annual weighted average of fluctuating currency exchange rates of each of the local currencies per one U.S. dollar for each of the local currencies in which annualized net sales would exceed $10.0 million during any of the two periods presented. The Company uses the annual average exchange rate for translating items from the statement of operations from local currencies into the Company’s reporting currency.

Three Months Ended March 31, 2018 2017
Canada (Dollar) 1.3
 1.3
European Markets (Euro) 0.8
 0.9
Japan (Yen) 108.3
 113.8
South Korea (Won) 1,072.1
 1,154.9
Mexico (Peso) 18.7
 20.3
The local currency of the foreign subsidiaries is used as the functional currency, except for subsidiaries operating in highly inflationary economies or where the Company’s operations are 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 Company's 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 re-measurement 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. As of March 31, 2018, the Company did not operate in any markets considered to have highly inflationary economies.

Item 4.        CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
The Company’sOur disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. The Company’sOur management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’sour disclosure controls and procedures as of March 31, 2018.2019. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that itsour disclosure controls and procedures were effective as of March 31, 2018,2019, at the reasonable assurance level.
 

Changes in Internal Control over Financial Reporting
 
There were no other changes in the Company’sour internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.

PART II OTHER INFORMATION
 
Item 1.                    LEGAL PROCEEDINGS
 
None.
 
Item 1A.           RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the risks discussed under the heading “Risk Factors” in the Company'sour Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could have a material adverse effect on the Company'sour business or consolidated financial statements, results of operations, and cash flows. Additional risks not currently known, or risks that are currently believed to be not material, may also impair business operations. There have been no material changes to the Company'sour risk factors since the filing of its Annual Report on Form 10-K for the year ended December 31, 2017.2018.
 
Item 2.                    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None

Item 3.                    DEFAULTS UPON SENIOR SECURITIES
 
None.
 
Item 4.                    MINE SAFETY DISCLOSURES

Not applicable.
 
Item 5.                    OTHER INFORMATION
 
None.

Item 6.                    EXHIBITS
 
a)            Index to Exhibits
 
Item No. Exhibit
31.1(1) 
31.2(1) 
32.1(1) 
32.2(1) 
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document


(1)        Filed currently herewith.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Nature's Sunshine Products, Inc.
   
Date:May 10, 20189, 2019/s/ Gregory L. ProbertTerrence O. Moorehead
  Gregory L. Probert,Terrence O. Moorehead,
  President and Chief Executive Officer and Chairman of the Board
   
   
Date:May 10, 20189, 2019/s/ Joseph W. Baty
  Joseph W. Baty,
  Executive Vice President, Chief Financial Officer and Treasurer

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