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 that could cause actual results to vary materially.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:

 It is not possible to predict or identify all potential risks and uncertainties and the above list is not a complete list of all potential risks and uncertainties. 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.”

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.

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. The Company consolidates the joint ventures in Hong Kong and China in its consolidated financial statements, with another party's interest presented as noncontrolling interest. 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 June 30, 2018,2019, and for the three and six-month periods ended June 30, 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 decreased as a result of the net loss attributable to the noncontrolling interests by $0.3$0.1 million and $0.5$0.3 million during the six months ended June 30, 20182019 and 2017,2018, respectively. As of June 30, 2018,2019 and December 31, 2017,2018, noncontrolling deficits were $25,000 and noncontrolling interests were $0.1 million and $0.4 million, respectively.

Accrued severance and rent costs wereWe recorded $0.4 million and $0.8$2.0 million as of June 30, 2018 and December 31, 2017, respectively. The Company did not record any additional restructuring related expenses during the three and six months ended June 30, 2019, respectively. We recorded no restructuring related expenses during the three and six months ended June 30, 2018. Accrued severance and restructuring related costs were $1.0 million and $0.3 million as of June 30, 2019 and December 31, 2018, and 2017, respectively.

During the second quarter of 2018, the Companywe announced the pending retirement of itsour Chief Executive Officer. As a result, the Companywe recorded $1.5 million of transition relatedtransition-related expenses during the three-three and six-month periodssix months ended June 30, 2018. As of June 30, 2019 and December 31, 2018, accrued transitionstransition costs were $1.4 million.$0.6 million and $1.0 million, respectively.

 

The CompanyWe adopted the requirements of revenue recognition from Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (“Topic 606”)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 606.842.

In January 2016,February 2018, the Financial Accounting Standards Board ("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

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

The Company’sOur trading securities portfolio totaled $1.5$1.4 million at June 30, 2018,2019, and $2.0$1.3 million at December 31, 2017,2018, and generated gains of $34,000$40,000 and $51,000$34,000 for the three months ended June 30, 20182019 and 2017,2018, respectively, and $34,000$173,000 and $102,000$11,000 for the six months ended June 30, 20182019 and 2017,2018, respectively.

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 “Credit Agreement”). The Company paysWe pay interest on any borrowings under the Credit Agreement at LIBOR plus 1.25 percent (3.34(3.65 percent and 2.823.73 percent as of June 30, 20182019 and December 31, 2017)2018), and 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 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 June 30, 2018.2019. At June 30, 2018, the2019, there was no outstanding balance under the Credit Agreement was $7.2 million.Agreement.

The Credit Agreement contains customary financial covenants, including financial covenants relating to the Company’sour solvency, leverage, and minimum EBITDA. In addition, the Credit Agreement restricts certain capital expenditures, lease expenditures, other indebtedness, liens on assets, guarantees, loans and advances, dividends, and merger, consolidation and the transfer of assets except as permitted in the Credit Agreement. The Credit Agreement is collateralized by 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 June 30, 2018, the Company was2019, we were in compliance with the debt covenants set forth in the Credit Agreement.

Basic net income (loss) per common share (“Basic EPS”), is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) 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 (loss) per common share.

Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and six months ended June 30, 20182019 and 20172018 (dollar and share amounts in thousands, except for per share information): 

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

During the year ended December 31, 2012, the Company’sour shareholders adopted and approved the Nature’s Sunshine Products, Inc. 2012 Stock Incentive Plan (the “2012 Incentive Plan”).  The 2012 Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  The Compensation Committee of the Board of Directors has authority and discretion to determine the type of award, as well as the amount, terms and conditions of each award under the 2012 Incentive Plan, subject to the limitations of the 2012 Incentive Plan. A total of 1,500,000 shares of the Company’sour common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In 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 maintainsmaintain a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and

Stock Options

The Company’sOur outstanding stock options include time-based stock options, which vest over differing periods of time ranging from the date of issuance to up to 48 months from the option grant date, 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 six-month period ended June 30, 2018,2019, is as follows (amounts in thousands, except per share information):

Share-based compensation expense from time-based stock options for the three-month periods ended June 30, 20182019 and 2017,2018, was approximately $0.1 million$0 and $0.3$0.1 million, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 20182019 and 2017,2018, was approximately $0.1 million$0 and $0.4$0.1 million, respectively. As of June 30, 2019 and December 31, 2018, there was no unrecognized share-based compensation expense related to the grants described above as all outstanding options were vested. As of December 31, 2017, the unrecognized share-based compensation expense related to the grants described above was $13,000.above.

At June 30, 2018,2019, the aggregate intrinsic value of outstanding and vestedexercisable stock options to purchase 1,268,000940,000 shares of common stock was $0.3 million. At December 31, 2017,2018, the aggregate intrinsic value of outstanding and exercisable options to purchase 1,390,0001,114,000 shares of common stock the exercisable options 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 $0.0 million, respectively.$0.2 million.

For the six-month periods ended June 30, 2019 and 2018, we issued 1,000 and 2017, the Company issued 69,000 and 9,000 shares of common stock upon the exercise of stock options at an average exercise price of $5.11$2.35 and $11.98$5.11 per share, respectively. The aggregate intrinsic valuesvalue of options exercised during the six-month periods ended June 30, 2019 and 2018, was $10,000 and 2017, was $0.4 million, and $7,000, respectively. For the six-month periods ended June 30, 20182019 and 2017,2018, the Company recognized $0.1 million$3,000 and $0.0$0.1 million of tax benefits from the exercise of stock options, respectively.

As of June 30, 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 of time ranging from 12 months to up to 4836 months from the RSU grant date, as well as performance-based RSUs, which vest either upon achieving cumulative annual net salestargets relating to 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 granted to members of the Company's Board of Directors contain a restriction period in which the shares are not issued until the expiration of a two-year restriction period followingtwo years after vesting. There were 56,000 and 96,000 vested RSUs as ofAt June 30, 2018,2019 and December 31, 2017,2018, there were 78,000 and 80,000 vested RSUs, respectively, that have been grantedgiven to members of the Company's Board of Directors but remain subject to the two-yearthat had a restriction period.

RSU Restricted stock unit activity for the six-month period ended June 30, 2018,2019, is as follows (amounts in thousands, except per share information):

During the six-month period ended June 30, 2018, the Company2019, we granted 237,000333,000 RSUs under the 2012 Incentive Plan to the Company’s Board of Directors, executive officers and other employees, which were comprised of both time-based RSUs and net sales and adjusted EBITDAshare-priced performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $10.93$8.59 per share and vest in annual installments over a three-year period from the grant date or according to the restrictions for the Board of Directors noted above. The net sales and adjusted EBITDA earnings-per-shareshare-priced 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-priced targets over a three-year period from the grant date.

Except for share-priced performance RSUs, RSUs are valued at market value on the date of grant, which is the grant date share price discounted for expected dividend payments during the vesting period. For RSUs with post-vesting restrictions, a Finnerty Model was utilized to calculate a valuation discount from the market value of common shares reflecting the restriction embedded in the RSUs preventing the sale of the underlying shares over a certain period of time. The Finnerty Model proposes to estimate a discount for lack of marketability such as transfer restrictions by using an option pricing theory. 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 11.913.4 percent for a common share.

Share-based compensation expense for RSUs for the three-month periods ended June 30, 20182019 and 2017,2018, was approximately $0.5 million and $0.7$0.5 million, respectively. Share-based compensation expense from RSUs for the six-month periods ended June 30, 20182019 and 2017,2018, was approximately $1.0$0.6 million and $1.3$1.0 million, respectively. As of June 30, 2018,2019 and December 31, 2017,2018, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $1.9$2.1 million and $2.0$1.8 million, respectively. The remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.30.9 years.

The Company has not recognized any share-basedShare-based compensation expense related to performance-based RSUs for the net salesthree-month periods ended June 30, 2019 and earnings-per-share2018, was $0.1 million and $0, respectively. Share-based compensation expense related to performance-based RSUs for the six-month periods ended June 30, 2019 and 2018, was $0.2 million and 2017.$0, respectively. Should the Companywe attain all of the net sales metrics related to the net sales performance-based stock optionRSU grants, the Companywe would recognize up to $4.0$2.1 million of potential share-based compensation expense. We currently expect to recognize an additional $1.1 million of that potential share-based compensation expense.

The number of shares issued upon vesting of RSUs granted pursuant to 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 23,000 and 40,000 shares for the six-month periodperiods ended June 30, 2018.2019 and 2018, respectively. Although shares withheld are not issued, they are treated as common share repurchases for accounting purposes, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the repurchase program described above. 

 

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

Net sales for each segment have been reduced by intercompany sales as they are not included in

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

 

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three and six months ended June 30, 2017,2018, was primarily attributed to current year foreign losses during those periods, largely related to China, that presently dowere not expected to provide future tax benefit, partially offset byas well as net unfavorable foreign tax credit benefits.related items.

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.

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

The Company isWe are a party to various other legal proceedings in the United States and several foreign jurisdictions related to value-added tax assessments and other civil litigation. As of June 30, 20182019 and December 31, 2017,2018, accrued liabilities were $1.4$2.0 million and $1.5$1.7 million, respectively, related to the estimated outcome of these proceedings. In addition, the Company iswe are a party to other litigation where there is a reasonable possibility that a loss may be incurred, either the losses are not considered to be probable or 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 $1.9$0.4 million.

During the three and six months ended June 30, 2019, NSP China did not borrow any amounts from the Company or our joint venture partner. During the three and six months ended June 30, 2018, NSP China borrowed $0 and $2.0 million from the Company and $0 and $0.5 million the Company'sfrom our joint venture partner, respectively. These notes are payable in one year and bear interest of 3.0 percent. As of June 30, 20182019 and December 31, 20172018 outstanding borrowings by NSP China from the Company were $4.1$6.2 million and $2.0$6.0 million, respectively. As of June 30, 20182019 and December 31, 20172018 outstanding borrowings by NSP China from the Company'sour joint venture partner were $1.0$1.5 million and $0.5$1.5 million, respectively. The notes between NSP China and the Company eliminate in consolidation.

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table presents the Company’sour hierarchy for itsour assets, measured at fair value on a recurring basis, as of June 30, 20182019 (dollar amounts in thousands):