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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 June 30, 2017
 
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
logoa02.jpg 
 
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, 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.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(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.
 
The number of shares of Common Stock, no par value, outstanding on July 28, 2017, was 18,892,781 shares.
 

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NATURE’S SUNSHINE PRODUCTS, INC.
FORM 10-Q
 
For the Quarter Ended June 30, 2017
 
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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's objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that the Company intends, expects, projects, believes or anticipates 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 their experience and their perception of historical trends, current conditions, expected future developments and other factors they 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. 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, 2016, but include the following:

•
changes in laws and regulations, or their interpretation, applicable to direct selling or the nutritional supplement industry may prohibit or restrict the Company's ability to sell its products in some markets or require the Company to make changes to its business model in some markets;
•
legal challenges to its direct selling program or to the classification of its independent distributors;
•
complex legal and regulatory requirements in China, including the failure to obtain the necessary approvals and licenses to expand its direct sales activities in China;
•
extensive government regulations to which its products, business practices and manufacturing activities are subject;
•
the impact of anti-bribery laws, including the U.S. Foreign Corrupt Practices Act;
•
the full implementation of its joint venture for operations in China with Fosun Industrial Co., Ltd.;
•
registration of products for sale in China, or difficulty or increased cost of importing products into China;
•
its business practices in some of the jurisdictions in which it operates, including China and South Korea, where the business practices may be legal and compliant with local and foreign law, but still draw unnecessary media or regulatory attention;
•
its ability to attract and retain independent distributors;
•
the effect of fluctuating foreign exchange rates;
•
negative consequences resulting from difficult economic conditions, including the availability of liquidity or the willingness of its customers to purchase products;
•
geopolitical issues and conflicts;
•
restrictions on the repatriation of money;
•
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;
•
taxation relating to its independent distributors;
•
high levels of inflation in one or more of the countries in which the Company operates;
•
cyber security threats and exposure to data loss;
•
reliance on information technology infrastructure;
•
liabilities and obligations arising from improper activity by its agents, employees or independent distributors;
•
its relationship with, and its inability to influence the actions of, its independent distributors, and other third parties with whom it does business;
•
its reliance upon, or the loss or departure of any member of, its senior management team;
•
challenges in managing rapid growth in China;
•
the slowing of the Chinese economy;
•
negative effects from its independent distributor promotions or compensation plans;
•
risks associated with the manufacturing of the Company's products;
•
availability and integrity of raw materials;
•
obsolescence of product inventory;
•
changing consumer preferences and demands;
•
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;
•
product liability claims;

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•
the sufficiency of trademarks and other intellectual property rights; and
•
reliance on third-parties to distribute its products and provide support services to independent distributors.
 
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 Company 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, Nature’s Sunshine Products, Inc., together with its subsidiaries, are referred to as “the Company.”

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PART I FINANCIAL INFORMATION
 
Item 1.  FINANCIAL STATEMENTS
 
NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(Unaudited)
 
June 30,
2017
 
December 31,
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
31,821

 
$
32,284

Accounts receivable, net of allowance for doubtful accounts of $190 and $205, respectively
9,220

 
7,738

Investments available for sale
—

 
1,776

Assets held for sale
—

 
521

Inventories
50,958

 
47,597

Prepaid expenses and other
5,902

 
4,585

Total current assets
97,901

 
94,501

 
 
 
 
Property, plant and equipment, net
72,662

 
73,272

Investment securities - trading
1,786

 
1,391

Intangible assets, net
1,007

 
976

Deferred income tax assets
21,391

 
21,590

Other assets
13,816

 
13,840

 
$
208,563

 
$
205,570

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
5,361

 
$
5,305

Accrued volume incentives and service fees
17,654

 
16,264

Accrued liabilities
21,798

 
24,400

Deferred revenue
5,258

 
3,672

Revolving credit facility payable
11,954

 
9,919

Income taxes payable
2,795

 
3,475

Total current liabilities
64,820

 
63,035

 
 
 
 
Liability related to unrecognized tax benefits
6,966

 
6,755

Deferred compensation payable
1,786

 
1,391

Other liabilities
1,307

 
1,991

Total liabilities
74,879

 
73,172

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders’ equity:
 

 
 

Common stock, no par value, 50,000 shares authorized, 18,893 and 18,757 shares issued and outstanding, respectively
131,008

 
129,654

Retained earnings
12,805

 
12,718

Noncontrolling interests
756

 
1,286

Accumulated other comprehensive loss
(10,885
)
 
(11,260
)
Total shareholders’ equity
133,684

 
132,398

 
$
208,563

 
$
205,570

 
See accompanying notes to condensed consolidated financial statements.


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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited) 
 
Three Months Ended
June 30,
 
2017
 
2016
Net sales
$
81,344

 
$
89,366

Cost of sales
21,197

 
23,078

Gross profit
60,147

 
66,288

 
 
 
 
Operating expenses:
 

 
 

Volume incentives
28,288

 
30,791

Selling, general and administrative
31,836

 
31,249

Operating income
23

 
4,248

Other income (expense), net
441

 
(622
)
Income before provision for income taxes
464

 
3,626

Provision for income taxes
884

 
1,260

Net income (loss)
(420
)
 
2,366

Net loss attributable to noncontrolling interests
(233
)
 
(202
)
Net income (loss) attributable to common shareholders
$
(187
)
 
$
2,568

 
 
 
 
Basic and diluted net income (loss) per common share:
 

 
 

 
 
 
 
Basic earnings (loss) per share attributable to common shareholders
$
(0.01
)
 
$
0.14

 
 
 
 
Diluted earnings (loss) per share attributable to common shareholders
$
(0.01
)
 
$
0.14

 
 
 
 
Weighted average basic common shares outstanding
18,876

 
18,723

Weighted average diluted common shares outstanding
18,876

 
18,940

 
 
 
 
Dividends declared per common share
$
—

 
$
0.10

 
See accompanying notes to condensed consolidated financial statements.


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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited) 
 
Six Months Ended
June 30,
 
2017
 
2016
Net sales
$
164,442

 
$
171,768

Cost of sales
42,925

 
45,098

Gross profit
121,517

 
126,670

 
 
 
 
Operating expenses:
 

 
 

Volume incentives
57,271

 
60,668

Selling, general and administrative
62,172

 
59,634

Operating income
2,074

 
6,368

Other income, net
1,716

 
937

Income before provision for income taxes
3,790

 
7,305

Provision for income taxes
2,347

 
3,150

Net income
1,443

 
4,155

Net loss attributable to noncontrolling interests
(530
)
 
(482
)
Net income attributable to common shareholders
$
1,973

 
$
4,637

 
 
 
 
Basic and diluted net income per common share:
 

 
 

 
 
 
 
Basic earnings per share attributable to common shareholders
$
0.10

 
$
0.25

 
 
 
 
Diluted earnings per share attributable to common shareholders
$
0.10

 
$
0.24

 
 
 
 
Weighted average basic common shares outstanding
18,861

 
18,708

Weighted average diluted common shares outstanding
19,251

 
18,946

 
 
 
 
Dividends declared per common share
$
0.10

 
$
0.20


See accompanying notes to condensed consolidated financial statements.

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NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited) 
 
Three Months Ended
June 30,
 
2017
 
2016
Net income (loss)
$
(420
)
 
$
2,366

Foreign currency translation gain (loss), net of tax
(552
)
 
537

Net unrealized gains on investment securities (net of tax)
15

 
4

Total comprehensive income (loss)
$
(957
)
 
$
2,907

 
 
Six Months Ended
June 30,
 
2017
 
2016
Net income
$
1,443

 
$
4,155

Foreign currency translation gain (net of tax)
360

 
462

Net unrealized gains on investment securities (net of tax)
15

 
16

Total comprehensive income
$
1,818

 
$
4,633

 
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
 
Retained
Earnings
 
Noncontrolling
Interests
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Shares
 
Amount
 
 
 
 
Balance at January 1, 2017
18,757

 
$
129,654

 
$
12,718

 
$
1,286

 
$
(11,260
)
 
$
132,398

Share-based compensation expense
—

 
1,762

 
—

 
—

 
—

 
1,762

Shares issued from the exercise of stock options and vesting of restricted stock units, net of shares exchanged for withholding tax
136

 
(408
)
 
—

 
—

 
—

 
(408
)
Cash dividends ($0.10 per share)
—

 
—

 
(1,886
)
 
—

 
—

 
(1,886
)
Net income
—

 
—

 
1,973

 
(530
)
 
—

 
1,443

Other comprehensive income
—

 
—

 
—

 
—

 
375

 
375

Balance at June 30, 2017
18,893

 
$
131,008

 
$
12,805

 
$
756

 
$
(10,885
)
 
$
133,684

 
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) 

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Six Months Ended
June 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net income
$
1,443

 
$
4,155

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Provision for doubtful accounts
(22
)
 
62

Depreciation and amortization
3,585

 
2,396

Share-based compensation expense
1,762

 
1,586

(Gain) loss on sale of property and equipment
(10
)
 
78

Deferred income taxes
263

 
311

Purchase of trading investment securities
(367
)
 
(252
)
Proceeds from sale of trading investment securities
73

 
56

Realized and unrealized gains on investments
(79
)
 
(60
)
Foreign exchange gains
(1,882
)
 
(546
)
Changes in assets and liabilities:
 

 
 

Accounts receivable
(1,429
)
 
(164
)
Inventories
(2,359
)
 
(6,177
)
Prepaid expenses and other current assets
(1,221
)
 
(912
)
Other assets
358

 
(1,027
)
Accounts payable
109

 
2,402

Accrued volume incentives and service fees
1,082

 
2,798

Accrued liabilities
(3,542
)
 
950

Deferred revenue
1,586

 
735

Income taxes payable
(636
)
 
(150
)
Liability related to unrecognized tax benefits
207

 
231

Deferred compensation payable
395

 
(9
)
Net cash provided by (used in) operating activities
(684
)
 
6,463

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchases of property, plant and equipment
(3,134
)
 
(4,592
)
Proceeds from sale of property, plant and equipment
522

 
—

Proceeds from sale/maturities of investments available for sale
1,776

 
—

Net cash used in investing activities
(836
)
 
(4,592
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Payments of cash dividends
(1,886
)
 
(3,756
)
Net borrowings on revolving credit facility
2,035

 
1,224

Net proceeds from the exercise of stock options
104

 
59

Payment of withholding taxes related to the vesting of restricted stock units
(512
)
 
(169
)
Net cash used in financing activities
(259
)
 
(2,642
)
Effect of exchange rates on cash and cash equivalents
1,316

 
779

Net increase (decrease) in cash and cash equivalents
(463
)
 
8

Cash and cash equivalents at the beginning of the period
32,284

 
41,420

Cash and cash equivalents at the end of the period
$
31,821

 
$
41,428

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 

 
 

Cash paid for income taxes
$
2,418

 
$
3,036

Cash paid for interest
108

 
122

 
See accompanying notes to condensed consolidated financial statements.

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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”), is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company sells its products to a sales force of independent distributors who use the products themselves or resell 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. 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’s financial information as of June 30, 2017, and for the three and six-month periods ended June 30, 2017 and 2016.  The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year ending December 31, 2017.
 
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’s Annual Report on Form 10-K for the year ended December 31, 2016.

Noncontrolling Interests

Noncontrolling interests decreased as a result of the net loss attributable to the noncontrolling interests by 0.5 million and $0.5 million during the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, and December 31, 2016, noncontrolling interests were 0.8 million and $1.3 million, respectively.

Classification of Ukraine as a Highly Inflationary Economy and Devaluation of Its Currency

As of June 2017, Ukraine has been designated as a highly inflationary economy. The U.S. dollar is the Company’s functional currency for this market. As a result, there were no resulting gains or losses from a re-measurement of the financial statements using official rates of the Company’s Ukrainian subsidiary.  However, as a result of the weakening of the Ukraine Hryvnia, the purchasing power of the Company’s independent Distributors in this market has diminished. During the three months ended June 30, 2017 and 2016, the Company’s Ukrainian subsidiary’s net sales represented approximately 2.1 percent and 2.0 percent of consolidated net sales, respectively. During the six months ended June 30, 2017 and 2016, the Company’s Ukrainian subsidiary’s net sales represented approximately 2.4 percent and 2.1 percent of consolidated net sales, respectively.

Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 - Revenue from Contracts with Customers (Topic 606), and has subsequently issued ASUs 2015-14 - Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, 2016-08 - Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross Versus Net), 2016-10 - Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and 2016-20 - Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements to Topic 606 (collectively, Topic 606).

Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The

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guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective for the Company beginning on January 1, 2018, and provides the Company with the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The Company expects to adopt Topic 606 using the modified retrospective approach, under which the cumulative effect of initially applying Topic 606 is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.

The Company is concluding the assessment phase of implementing this guidance. The Company has evaluated each of the five steps in Topic 606, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied. The Company expects to identify similar performance obligations under ASC Topic 606, as compared with deliverables and separate units of account previously identified. As a result, the adoption of this ASU is not expected to have a material impact on the Company’s results of operations, consolidated financial statements and footnote disclosures.

There are also certain considerations related to internal control over financial reporting that are associated with implementing Topic 606. The Company is currently evaluating its control framework for revenue recognition and identifying any changes that may need to be made in response to the new guidance. Disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance. Designing and implementing the appropriate controls over gathering and reporting the information required under Topic 606 is currently in process.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This guidance requires that entities with a classified statement of financial position present all deferred tax assets and liabilities as noncurrent. This update is effective and has been applied on the retrospective basis. Other than the netting of current deferred tax assets of $5.6 million, which increased long-term deferred tax assets from $16.0 million to $21.6 million as of December 31, 2016, the adoption of this ASU did not have a material impact on the Company’s results of operations and consolidated financial statements.

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. Generally Accepted Accounting Principles ("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 is not expected to 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 is not expected to have a material impact on the Company’s results of operations; however, it is 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. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. While the Company does not expect the adoption of ASU 2017-09 to have a material effect on its business, the Company is still evaluating any potential impact that adoption of ASU 2017-09 may have on its results of operations, consolidated financial statements and footnote disclosures.
 

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(2)    Inventories
 
The composition of inventories is as follows (dollar amounts in thousands):
 
 
June 30,
2017
 
December 31,
2016
Raw materials
$
12,969

 
$
14,995

Work in progress
1,141

 
694

Finished goods
36,848

 
31,908

Total inventory
$
50,958

 
$
47,597


(3)    Investments
 
As of June 30, 2017, the Company had no investments available for sale. Proceeds from the sale of available-for-sale investments were $1.8 million during the six-month period ended June 30, 2017.

The amortized cost and estimated fair values of available-for-sale securities by balance sheet classification are as follows (dollar amounts in thousands):
 
As of December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government securities funds
$
1,799

 
$
—

 
$
(23
)
 
$
1,776

Total short-term investment securities
$
1,799

 
$
—

 
$
(23
)
 
$
1,776

 
There were no proceeds from the sale of investments during the six-months ended June 30, 2016.
 
The Company’s trading securities portfolio totaled $1.8 million at June 30, 2017, and $1.4 million at December 31, 2016, and generated gains of $51,000 and $28,000 for the three months ended and $102,000 and $35,000 for the six months ended June 30, 2017 and 2016, respectively.
 
As of June 30, 2017, and December 31, 2016, the Company had an unrealized loss of $0 and $23,000, respectively, in its U.S. government securities funds. There were no securities that were in a loss position for more than 12 months.
 
(4)    Revolving Credit Facility

The Company had a revolving credit agreement with Wells Fargo Bank, N.A. with a borrowing limit of $25.0 million that was to mature on September 1, 2017, in accordance with its terms (the “Wells Fargo Credit Agreement”). The Company paid interest under the Wells Fargo Credit Agreement at LIBOR plus 1.25 percent (2.50 percent as of June 30, 2017, and 2.13 percent at December 31, 2016), and an annual commitment fee of 0.25 percent on the unused portion of the commitment. The Company settled its net borrowings under the Wells Fargo Credit Agreement daily, and as a result, classified its outstanding borrowings as current on its condensed consolidated balance sheet as of June 30, 2017. At June 30, 2017, and December 31, 2016, the outstanding balance under the Wells Fargo Credit Agreement was $12.0 million and $9.9 million, respectively. The Company was in compliance with the debt covenants set forth in the Wells Fargo Credit Agreement as of June 30, 2017.

On July 11, 2017, the Company 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 Agreement”). In connection with the closing of the Bank of America Credit Agreement, the Company terminated the Wells Fargo Credit Agreement and satisfied in full the outstanding balance thereof through borrowings on the Bank of America Credit Agreement. The Company pays interest under the Bank of America Credit Agreement at LIBOR plus 1.25 percent on any borrowings and pays an annual commitment fee of 0.2 percent on the unused portion of the commitment.

The Bank of America Credit Agreement contains customary financial covenants, including financial covenants relating to the Company’s 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

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America Credit Agreement is collateralized by the Company's manufacturing facility, accounts receivable balance, inventory balance and other assets.

(5)    Net Income (Loss) Per Share
 
Basic net income (loss) 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 (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, 2017 and 2016 (dollar and share amounts in thousands, except for per share information): 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss) attributable to common shareholders
$
(187
)
 
$
2,568

 
$
1,973

 
$
4,637

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
18,876

 
18,723

 
18,861

 
18,708

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to common shareholders
$
(0.01
)
 
$
0.14

 
$
0.10

 
$
0.25

 
 
 
 
 
 
 
 
Diluted shares outstanding
 

 
 

 
 

 
 

Basic weighted-average shares outstanding
18,876

 
18,723

 
18,861

 
18,708

Stock-based awards
—

 
217

 
390

 
238

Diluted weighted-average shares outstanding
18,876

 
18,940

 
19,251

 
18,946

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to common shareholders
$
(0.01
)
 
$
0.14

 
$
0.10

 
$
0.24

 
 
 
 
 
 
 
 
Dilutive shares excluded from diluted-per-share amounts:
 

 
 

 
 

 
 

Stock options
—

(1) 
86

 
371

 
86

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from diluted-per-share amounts:
 

 
 

 
 

 
 

Stock options
2,444

(1) 
1,445

 
1,363

 
1,445


(1)   As a result of the net loss for the three months ended June 30, 2017, no potentially dilutive securities are included in the calculation of diluted earnings (loss) per share because such effect would be anti-dilutive. Potentially dilutive securities include 1,540 outstanding options to purchase shares of common stock and 904 restricted stock units.

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 (i) 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 (ii) shares that would be anti-dilutive to the computation of diluted net income per share for each of the years presented.
 
(6)    Capital Transactions
 
Dividends
 
On March 7, 2017, the Company announced a cash dividend of $0.10 per common share in the aggregate of $1.9 million, which was paid on April 3, 2017, to shareholders of record as of March 22, 2017.


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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 Repurchase Program
 
In November 2014, the Board of Directors authorized a $20.0 million share repurchase program beginning January 1, 2015. Such purchases may be made in the open market, through block trades, in privately negotiated transactions or otherwise. The timing and amount of any shares repurchased will be determined based on the Company’s evaluation of market conditions and other factors and the program may be discontinued or suspended at any time. At June 30, 2017, the remaining balance available for repurchases under the program was $13.4 million. There were no repurchases of common shares under the share repurchase program by the Company during the six months ended June 30, 2017 and 2016.
 
Share-Based Compensation
 
During the year ended December 31, 2012, the Company’s 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’s common stock were originally authorized for the granting of awards under the 2012 Incentive Plan. In 2015, the Company’s 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 Company also maintains a stock incentive plan, which was approved by shareholders in 2009 (the “2009 Incentive Plan”). The 2009 Incentive Plan also provided for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, performance awards, stock awards and other stock-based awards.  Under the 2012 Incentive Plan, any shares subject to award, or awards forfeited or reacquired by the Company issued under the 2009 Incentive Plan are available for award up to a maximum of 400,000 shares.
 
Stock Options
 
The Company’s 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, 2017, is as follows (amounts in thousands, except per share information):
 
Number of
Shares
 
Weighted Average
Exercise
Price Per Share
Options outstanding at December 31, 2016
1,524

 
$
12.41

Granted
25

 
13.50

Forfeited or canceled
—

 
—

Exercised
(9
)
 
11.98

Options outstanding at June 30, 2017
1,540

 
12.34

 
During the six months ended June 30, 2017, the Company issued options to purchase 25,000 shares of common stock under the 2012 Stock Incentive Plan to a new member of the Company's Board of Directors. These options were issued with an exercise price of $13.50 per share and a grant date fair value of $4.94 per share, with expected life of five years, risk-free interest rate of 1.8 percent, and expected volatility of 39.8 percent.

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During the six months ended June 30, 2017, the Company modified vested options to purchase 131,000 shares of common stock for one individual (included in options outstanding above) to extend the expiration date for approximately one year. It is expected the options will terminate by June 30, 2018. This was a modification of the terms of an equity award, and accordingly, the Company treated this as an exchange of the original award for a new award. The Company recorded incremental compensation expense of approximately $0.1 million for the six months ended June 30, 2017, which was included in selling, general and administrative expense on the accompanying statements of operations.

Share-based compensation expense from time-based stock options for the three-month periods ended June 30, 2017 and 2016, was approximately $0.3 million and $0.2 million, respectively. Share-based compensation expense from time-based stock options for the six-month periods ended June 30, 2017 and 2016, was approximately $0.4 million and $0.4 million, respectively. As of June 30, 2017 and December 31, 2016, the unrecognized share-based compensation expense related to the grants described above was $0.2 million and $0.3 million, respectively. As of June 30, 2017, the remaining compensation cost is expected to be recognized over the weighted-average period of approximately 0.6 years.
 
At June 30, 2017, the aggregate intrinsic value of outstanding stock options to purchase 1,540,000 shares of common stock, exercisable stock options to purchase 1,409,000 shares of common stock and stock options to purchase 130,000 shares of common stock that are expected to vest was $2.2 million, $2.2 million and $0, respectively. At December 31, 2016, the aggregate intrinsic value of outstanding options to purchase 1,524,000 shares of common stock, the exercisable options to purchase 1,201,000 shares of common stock, and options to purchase 306,000 shares of common stock expected to vest was $4.2 million, $3.7 million and $0.4 million, respectively.

For the six-month periods ended June 30, 2017 and 2016, the Company issued 9,000 and 25,000 shares of common stock upon the exercise of stock options at an average exercise price of $11.98 and $2.35 per share, respectively. The aggregate intrinsic values of options exercised during the six-month periods ended June 30, 2017 and 2016, was $7,000 and $0.2 million, respectively. For the six-month period ended June 30, 2017 and 2016, the Company recognized $0 and $0.1 million of tax benefits from the exercise of stock options during the period, respectively.
 
Restricted Stock Units
 
The Company’s outstanding restricted stock units ("RSUs"), include time-based RSUs, which vest over differing periods of time ranging from 12 months to up to 48 months from the RSU grant date, as well as performance-based RSUs, which vest either upon achieving cumulative annual net sales growth targets over a rolling one-year period or upon achieving earnings-per-share targets over a rolling one-year period. RSUs granted to the Board of Directors contain a restrictive period pursuant to which the shares are not issued until two years after vesting. At June 30, 2017, and December 31, 2016, there were 65,000 and 69,000, respectively, vested RSUs that have been granted to the Board of Directors that have vested but remain subject to the two-year restriction period.
 
RSU activity for the six-month period ended June 30, 2017, is as follows (amounts in thousands, except per share information):
 
Number of
Shares
 
Weighted Average
Grant Date
Fair Value
Restricted Stock Units outstanding at December 31, 2016
838

 
$
11.39

Granted
256

 
12.69

Forfeited
(25
)
 
12.37

Issued
(165
)
 
12.16

Restricted Stock Units outstanding at June 30, 2017
904

 
11.68

 
During the six-month period ended June 30, 2017, the Company granted 256,000 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 operating income and earnings-per-share performance-based RSUs. The time-based RSUs were issued with a weighted-average grant date fair value of $12.69 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 operating income and earnings-per-share performance-based RSUs were issued with a weighted-average grant date fair value of $13.35 per share and vest upon achieving both (i) net sales and operating income targets over a three-year period from the grant date and (ii) earnings-per-share targets over a six-year period from the grant date.

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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. 
 
Share-based compensation expense for RSUs for the three-month periods ended June 30, 2017 and 2016, was approximately $0.7 million and $0.5 million, respectively. Share-based compensation expense from RSUs for the six-month periods ended June 30, 2017 and 2016, was approximately $1.3 million and $1.1 million, respectively. As of June 30, 2017, and December 31, 2016, the unrecognized share-based compensation expense related to the grants described above, excluding incentive awards discussed below, was $2.6 million and $2.0 million, respectively. The remaining compensation expense is expected to be recognized over the weighted average period of approximately 1.2 years.
 
The Company has not recognized any share-based compensation expense related to the net sales and earnings-per-share performance-based RSUs for the six-month periods ended June 30, 2017 and 2016.  Should the Company attain all of the net sales metrics related to the net sales performance-based stock option grants, the Company would recognize up to $4.2 million of potential share-based compensation expense.
 
The number of shares issued upon vesting of RSUs granted pursuant to the Company's share-based compensation plans is net of the minimum statutory withholding requirements that the Company pays on behalf of its employees, which was 20,000 shares for the six-month period ended June 30, 2017. 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. 

(7)    Segment Information
 
The Company has four business segments. These business segments are components of the Company for which separate information is available and evaluated regularly by the chief executive officer in deciding how to allocate resources and in assessing relative performance.
 
The Company's four business segments 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 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 China and New Markets), and one business segment operates under the Synergy® WorldWide brand.


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Reportable business segment information is as follows (dollar amounts in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales:
 

 
 

 
 

 
 

NSP Americas
$
39,421

 
$
44,725

 
$
84,066

 
$
89,908

NSP Russia, Central and Eastern Europe
6,662

 
6,269

 
14,269

 
12,621

Synergy WorldWide
30,363

 
33,013

 
57,676

 
62,861

China and New Markets
4,898

 
5,359

 
8,431

 
6,378

Total net sales
81,344

 
89,366

 
164,442

 
171,768

 
 
 
 
 
 
 
 
Contribution margin (1):
 

 
 

 
 

 
 

NSP Americas
16,495

 
19,103

 
35,690

 
38,020

NSP Russia, Central and Eastern Europe
2,246

 
2,065

 
4,755

 
4,246

Synergy WorldWide
9,410

 
10,245

 
17,609

 
19,184

China and New Markets
3,708

 
4,084

 
6,192

 
4,552

Total contribution margin
31,859

 
35,497

 
64,246

 
66,002

 
 
 
 
 
 
 
 
Selling, general and administrative expenses (2)
31,836

 
31,249

 
62,172

 
59,634

Operating income
23

 
4,248

 
2,074

 
6,368

 
 
 
 
 
 
 
 
Other income (expense), net
441

 
(622
)
 
1,716

 
937

Income from continuing operations before provision for income taxes
$
464

 
$
3,626

 
$
3,790

 
$
7,305

_________________________________________

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

(2)  Service fees in the China and New Markets segment related to sales in China, occurring after the Company's receipt of its direct selling license, and pre-opening product sales through Hong Kong totaled $1.7 million and $2.6 million for the three and six-month periods ended June 30, 2017, respectively, compared to $2.0 million for the three and six-month periods ended June 30, 2016. These service fees are included in the Company's selling, general and administrative expenses.

From an individual country perspective, only the United States and South Korea comprise 10 percent or more of consolidated net sales for the three and six-month periods ended June 30, 2017 and 2016, as follows (dollar amounts in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net sales:
 

 
 

 
 

 
 

United States
$
33,805

 
$
37,598

 
$
71,540

 
$
75,893

South Korea
12,486

 
15,473

 
23,832

 
28,671

Other
35,053

 
36,295

 
69,070

 
67,204

 
$
81,344

 
$
89,366

 
$
164,442

 
$
171,768



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Net Sales generated by each of the Company’s product lines is set forth below (dollar amounts in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
NSP Americas:
 

 
 

 
 

 
 

General health
$
18,181

 
$
20,234

 
$
38,047

 
$
39,851

Immune
3,169

 
3,738

 
8,242

 
9,314

Cardiovascular
2,820

 
3,418

 
6,136

 
6,530

Digestive
11,660

 
11,845

 
23,808

 
24,924

Personal care
1,487

 
2,853

 
3,373

 
3,783

Weight management
2,104

 
2,637

 
4,460

 
5,506

 
39,421

 
44,725

 
84,066

 
89,908

NSP Russia, Eastern and Central Europe:
 

 
 

 
 

 
 

General health
$
2,941

 
$
2,501

 
$
6,499

 
$
5,224

Immune
638

 
857

 
1,401

 
1,397

Cardiovascular
480

 
493

 
1,011

 
970

Digestive
2,030

 
1,407

 
3,907

 
3,528

Personal care
424

 
853

 
1,032

 
1,102

Weight management
149

 
158

 
419

 
400

 
6,662

 
6,269

 
14,269

 
12,621

Synergy WorldWide:
 

 
 

 
 

 
 

General health
$
7,624

 
$
9,694

 
$
14,311

 
$
18,334

Immune
117

 
41

 
238

 
250

Cardiovascular
12,603

 
13,505

 
23,706

 
26,198

Digestive
4,154

 
3,442

 
7,619

 
5,929

Personal care
1,926

 
1,948

 
3,993

 
3,887

Weight management
3,939

 
4,383

 
7,809

 
8,263

 
30,363

 
33,013

 
57,676

 
62,861

China and New Markets:
 

 
 

 
 

 
 

General health
$
1,085

 
$
1,537

 
$
1,965

 
$
2,008

Immune
120

 
216

 
266

 
347

Cardiovascular
972

 
1,450

 
1,553

 
1,523

Digestive
1,813

 
1,262

 
3,455

 
1,522

Personal care
45

 
439

 
121

 
461

Weight management
863

 
455

 
1,071

 
517

 
4,898

 
5,359

 
8,431

 
6,378

 
$
81,344

 
$
89,366

 
$
164,442

 
$
171,768


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):
 
 
June 30,
2017
 
December 31,
2016
Property, plant and equipment:
 

 
 

United States
$
69,876

 
$
70,770

Other
2,786

 
2,502

Total property, plant and equipment
$
72,662

 
$
73,272

 

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Table of Contents

(8)    Income Taxes
 
For the three months ended June 30, 2017 and 2016, the Company’s provision for income taxes, as a percentage of income before income taxes was 190.5 percent and 34.7 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2017 and 2016, the Company’s provision for income taxes, as a percentage of income before income taxes was 61.9 percent and 43.1 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.
 
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, was primarily attributed to current year foreign losses, primarily related to China, that presently do not provide future tax benefit, partially offset by foreign tax credit benefits.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2016, was attributed to foreign tax credits arising from intercompany dividends paid by foreign subsidiaries to the U.S. corporation, offset by current year foreign losses, primarily related to China, that presently do not provide future tax benefit, and unfavorable adjustments related to foreign operations.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2016, was attributed to current year foreign losses, primarily related to China, that presently do not provide future tax benefit, and an adjustment of a prior year deferred tax asset related to foreign currency translation amounts, offset partially by foreign tax credits arising from intercompany dividends paid by foreign subsidiaries to the U.S. corporation.

Changes to the effective rate due to dividends received from foreign subsidiaries and the impact of foreign tax credits are expected to be recurring. Depending on various factors, changes from the foregoing items may be favorable or unfavorable in a particular period.
 
The Company’s U.S. federal income tax returns for 2013 through 2015 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2010 through 2016.
 
As of June 30, 2017, the company had accrued $7.0 million related to unrecognized tax positions, compared with $6.8 million as of December 31, 2016. This net increase was primarily attributed to changes in contingencies related to international tax.
 
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 its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.  Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.
 
(9)    Commitments and Contingencies
 
Legal Proceedings
 
The Company is 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’s 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 the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains 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, 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.
 

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Table of Contents

Non-Income Tax Contingencies
 
The Company has 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 provides 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 provides provisions for U.S. state sales taxes in each of the states where the Company has nexus. As of June 30, 2017 and December 31, 2016, accrued liabilities were $0.3 million, related to non-income tax contingencies. While management believes that the assumptions and estimates used to determine this liability are reasonable, the ultimate outcome of those matters cannot presently be determined. The Company believes future payments related to these matters could range from $0 to approximately $3.8 million.
 
Other Litigation
 
The Company is party to various other legal proceedings in several foreign jurisdictions related to value-added tax assessments and other civil litigation.  As of each of June 30, 2017, and December 31, 2016, accrued liabilities were $0.7 million related to the estimated outcome of these proceedings. In addition, the Company is 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 Company cannot at this time estimate the loss, if any; therefore, no provision for losses has been provided.  The Company believes future payments related to these matters could range from $0 to approximately $0.5 million.
 
(10)    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 June 30, 2017 (dollar amounts in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
Trading Investment securities
1,786

 
—

 
—

 
1,786

Total assets measured at fair value on a recurring basis
$
1,786

 
$
—

 
$
—

 
$
1,786

 

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The following table presents the Company’s hierarchy for its assets, measured at fair value on a recurring basis, as of December 31, 2016 (dollar amounts in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
Quoted Prices
in Active
Markets for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
Investments available-for-sale
 

 
 

 
 

 
 

U.S. government security funds
$
1,776

 
$
—

 
$
—

 
$
1,776

Trading Investment securities
1,391

 
—

 
—

 
1,391

Total assets measured at fair value on a recurring basis
$
3,167

 
$
—

 
$
—

 
$
3,167

 
Investments available-for-sale — The majority of the Company’s investment portfolio consists of U.S. government security funds. The Level 1 securities are valued using quoted prices for identical assets in active markets including equity securities and U.S. government treasuries. 
 
Trading Investment securities — The Company’s trading portfolio consists of various marketable securities that are valued using quoted prices in active markets.
 
For the six months ended June 30, 2017, and for the year ended December 31, 2016, there were no fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3).
 
The carrying amounts reflected on the condensed consolidated balance sheet for cash and cash equivalents, accounts receivable, accounts payable and the revolving credit facility payable approximate fair value due to their short-term nature. During the six months ended June 30, 2017 and 2016, the Company did not have any re-measurements of non-financial assets at fair value on a nonrecurring basis subsequent to their initial recognition.

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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's Annual Report on Form 10-K for the year ended December 31, 2016, and its other reports filed since the date of such Form 10-K.
 
OVERVIEW
 
The Company is a natural health and wellness company primarily engaged in the manufacturing and direct selling of nutritional and personal care products. The Company has 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 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 China and New Markets), and one business segment operates under the Synergy® WorldWide brand.

The Company’s independent distributors market and sell the Company's products to customers and sponsor other independent distributors who also market the Company's products to customers. The Company's revenue is highly dependent upon the number and productivity of its independent distributors. Growth in sales volume requires an increase in the productivity of its independent distributors and/or growth in the total number of its independent distributors. The Company seeks to motivate and provide incentives to its 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 second quarter of 2017, the Company experienced a decrease in its consolidated net sales of 9.0 percent (or a decrease of 8.9 percent in local currencies) compared to the same period in 2016. NSP Russia, Central and Eastern Europe net sales increased approximately 6.3 percent compared to the same period in 2016. NSP Americas net sales decreased approximately 11.9 percent compared to the same period in 2016 (or 11.5 percent in local currencies). China and New Markets net sales decreased approximately 8.6 percent compared to the same period in 2016. Synergy WorldWide net sales decreased approximately 8.0 percent compared to the same period in 2016 (or 8.2 percent in local currencies). The weakening of the U.S. dollar versus the local currencies primarily in the Company's Asian markets resulted in an approximate 0.1 percent, or $0.1 million decrease of its net sales during the quarter.

In second quarter of 2016, the Company began making pre-opening product sales through Hong Kong while awaiting its direct selling license in China. During the second quarter of 2017, the Company received its direct selling license in China, which allows the Company to expand its business scope in China to include direct selling activities.

The Company made a significant investment in its information systems of approximately $48.0 million as of June 30, 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 Oracle ERP negatively impacted net sales and profitability during the second quarter of 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. The Company is actively addressing these issues, but anticipates the implementation of the Oracle ERP system may continue to negatively impact net sales and profitability throughout the remainder of 2017.



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RESULTS OF OPERATIONS
 
The following table summarizes the Company's unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the three months ended June 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Three Months Ended
June 30, 2017
 
Three Months Ended
June 30, 2016
 
Change
 
Total
dollars
 
Percent of
net sales
 
Total
dollars
 
Percent of
net sales
 
Total
dollars
 
Percentage 
Net sales
$
81,344

 
100.0
 %
 
$
89,366

 
100.0
 %
 
$
(8,022
)
 
(9.0
)%
Cost of sales
21,197

 
26.1

 
23,078

 
25.8

 
(1,881
)
 
(8.2
)
 
60,147

 
73.9

 
66,288

 
74.2

 
(6,141
)
 
(9.3
)
Volume incentives
28,288

 
34.8

 
30,791

 
34.5

 
(2,503
)
 
(8.1
)
SG&A expenses
31,836

 
39.1

 
31,249

 
35.0

 
587

 
1.9

Operating income
23

 
—

 
4,248

 
4.8

 
(4,225
)
 
(99.5
)
Other income (expense), net
441

 
0.5

 
(622
)
 
(0.7
)
 
1,063

 
170.9

Income from continuing operations before income taxes
464

 
0.6

 
3,626

 
4.1

 
(3,162
)
 
(87.2
)
Provision for income taxes
884

 
1.1

 
1,260

 
1.4

 
(376
)
 
(29.8
)
Net income (loss)
$
(420
)
 
(0.5
)%
 
$
2,366

 
2.6
 %
 
$
(2,786
)
 
(117.8
)%

The following table summarizes the Company's unaudited consolidated operating results from continuing operations in U.S. dollars and as a percentage of net sales for the six months ended June 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
 
Change
 
Total
dollars
 
Percent of
net sales
 
Total
dollars
 
Percent of
net sales
 
Total
dollars
 
Percentage 
Net sales
$
164,442

 
100.0
%
 
$
171,768

 
100.0
%
 
$
(7,326
)
 
(4.3
)%
Cost of sales
42,925

 
26.1

 
45,098

 
26.3

 
(2,173
)
 
(4.8
)
 
121,517

 
73.9

 
126,670

 
73.7

 
(5,153
)
 
(4.1
)
Volume incentives
57,271

 
34.8

 
60,668

 
35.3

 
(3,397
)
 
(5.6
)
SG&A expenses
62,172

 
37.8

 
59,634

 
34.7

 
2,538

 
4.3

Operating income
2,074

 
1.3

 
6,368

 
3.7

 
(4,294
)
 
(67.4
)
Other income, net
1,716

 
1.0

 
937

 
0.5

 
779

 
83.1

Income from continuing operations before income taxes
3,790

 
2.3

 
7,305

 
4.3

 
(3,515
)
 
(48.1
)
Provision for income taxes
2,347

 
1.4

 
3,150

 
1.8

 
(803
)
 
(25.5
)
Net income
$
1,443

 
0.9
%
 
$
4,155

 
2.4
%
 
$
(2,712
)
 
(65.3
)%

 Net Sales
 
The Company’s international operations have provided, and are expected to continue to provide, a significant portion of its 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 its 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, the Company compares 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. Net sales in local currency 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 its 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 believes presenting the impact of foreign currency fluctuations is useful to investors because it allows a more meaningful comparison of net sales of its 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

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accordance with U.S. GAAP. Throughout the last five years, foreign currency exchange rates have fluctuated significantly. See Item 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 June 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Net Sales by Operating Segment
 
Three Months Ended
June 30, 2017
 
Three Months Ended
June 30, 2016
 
Percent
Change
 
Impact of
Currency
Exchange
 
Percent
Change
Excluding
Impact of
Currency
NSP Americas:
 

 
 

 
 

 
 

 
 

NSP North America
$
33,190

 
$
37,439

 
(11.3
)%
 
$
(117
)
 
(11.0
)%
NSP Latin America
6,231

 
7,286

 
(14.5
)
 
(37
)
 
(14.0
)
 
39,421

 
44,725

 
(11.9
)
 
(154
)
 
(11.5
)
NSP Russia, Central and Eastern Europe
6,662

 
6,269

 
6.3

 
12

 
6.1

Synergy WorldWide:
 

 
 

 
 

 
 

 
 

Synergy Asia Pacific
21,271

 
23,397

 
(9.1
)
 
217

 
(10.0
)
Synergy Europe
6,097

 
6,738

 
(9.5
)
 
(165
)
 
(7.1
)
Synergy North America
2,995

 
2,878

 
4.1

 
—

 
4.1

 
30,363

 
33,013

 
(8.0
)
 
52

 
(8.2
)
China and New Markets
4,898

 
5,359

 
(8.6
)
 
—

 
(8.6
)
 
$
81,344

 
$
89,366

 
(9.0
)%
 
$
(90
)
 
(8.9
)%

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 six months ended June 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Net Sales by Operating Segment
 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
 
Percent
Change
 
Impact of
Currency
Exchange
 
Percent
Change
Excluding
Impact of
Currency
NSP Americas:
 

 
 

 
 

 
 

 
 

NSP North America
$
71,236

 
$
75,745

 
(6.0
)%
 
$
(21
)
 
(5.9
)%
NSP Latin America
12,830

 
14,163

 
(9.4
)
 
(121
)
 
(8.6
)
 
84,066

 
89,908

 
(6.5
)
 
(142
)
 
(6.3
)
NSP Russia, Central and Eastern Europe
14,269

 
12,621

 
13.1

 
(17
)
 
13.2

Synergy WorldWide:
 

 
 

 
 

 
 

 
 

Synergy Asia Pacific
40,052

 
44,213

 
(9.4
)
 
810

 
(11.2
)
Synergy Europe
12,022

 
12,994

 
(7.5
)
 
(380
)
 
(4.6
)
Synergy North America
5,602

 
5,654

 
(0.9
)
 
—

 
(0.9
)
 
57,676

 
62,861

 
(8.2
)
 
430

 
(8.9
)
China and New Markets
8,431

 
6,378

 
32.2

 
—

 
32.2

 
$
164,442

 
$
171,768

 
(4.3
)%
 
$
271

 
(4.4
)%
 
Consolidated net sales for the three and six months ended June 30, 2017, was $81.3 million and $164.4 million, respectively, compared to $89.4 million and $171.8 million for the same periods in 2016, which are decreases of approximately 9.0 percent and 4.3 percent, respectively. The decrease was principally related to decreases in NSP Americas and Synergy WorldWide segments. NSP Americas decreased $5.3 million and $5.8 million for the three and six months ended June 30, 2017, compared to the same periods in 2016. Synergy WorldWide decreased $2.7 million and $5.2 million for the three and six

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months ended June 30, 2017, respectively, compared to the same periods in 2016. China and New Markets decreased $0.5 million and increased $2.1 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The three and six months ended June 30, 2017, were impacted by an unfavorable $0.1 million and a favorable $0.3 million in foreign currency exchange rate fluctuations, respectively. NPS Russia, Central and Eastern Europe net sales increased $0.4 million and $1.6 million for the three and six months ended June 30, 2017, respectively. Excluding the impacts of foreign currency exchange rate fluctuations, consolidated net sales decreased by 8.9 percent and 4.4 percent, respectively, from the same periods in 2016.
 
NSP Americas
 
Net sales from the Company's NSP Americas segment for the three and six months ended June 30, 2017, were $39.4 million and $84.1 million, respectively, compared to $44.7 million and $89.9 million for the same periods in 2016, or decreases of 11.9 percent and 6.5 percent, respectively. Net sales declined primarily due to interruptions in customer service associated with the implementation of the Oracle ERP system, which began in the Company's NSP America's segment during the second quarter of 2017. The implementation of the Oracle ERP system caused wait times for calls into the Company's call center to be longer than usual and caused difficulties within the Company's on-line product ordering system. The Company is addressing these issues and continues to address other issues relating to the implementation of the Oracle ERP system. The Company anticipates that the implementation of the Oracle ERP system may continue to negatively impact net sales and profitability throughout the remainder of 2017. In local currency, net sales decreased 11.5 percent and 6.3 percent, compared to the same three and six month periods in 2016, respectively. Fluctuations in foreign exchange rates had a $0.1 million favorable impact on net sales for the six months ended June 30, 2017. Active Managers within NSP Americas totaled approximately 6,400 and 7,000 at June 30, 2017 and 2016, respectively. Active Distributors and customers within NSP Americas totaled approximately 105,500 and 129,700 at June 30, 2017 and 2016, respectively. The issues associated with the implementation of the Oracle ERP system were a significant cause for the decrease in the number of independent Managers, Distributors and customers and negatively impacted the Company's ability to attract new Distributors and customers. Independent Managers and active independent Distributors and customers were down 18.1 percent, compared to the same period in 2016. The active independent Managers category includes independent Managers under the Company's various compensation plans that have achieved and maintained certain product sales levels. As such, all independent Managers are considered to be active independent Managers. The active Distributors and customers category includes independent Distributors and customers who have purchased products directly from the Company for resale and/or personal consumption during the previous three months.
 
Notable activity in the following markets contributed to the results of NSP Americas:
 
In the United States, net sales decreased approximately $3.9 million and $4.3 million, or 11.3 percent and 6.1 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016, primarily due to the issues associated with the implementation of the Oracle ERP system in the Company's NSP Americas segment during the second quarter of 2017.

In Canada, net sales decreased approximately $0.3 million and $0.2 million, respectively, or 12.1 percent and 3.6 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. In local currency, net sales decreased 7.8 percent and 3.2 percent compared to the same periods in 2016, primarily due to the issues associated with the Company's implementation of the Oracle ERP System in the Company's NSP Americas segment during the second quarter of 2017.

In Latin America, net sales decreased approximately $1.1 million and $1.3 million, or 14.5 percent and 9.4 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. In local currency, net sales for the three and six months ended June 30, 2017, decreased 14.0 percent and 8.6 percent, respectively, compared to the same periods in 2016. Currency devaluation had a $37,000 and $0.1 million favorable impact on net sales for the three and six months ended June 30, 2017, respectively. The decrease in net sales was primarily due to the issues associated with the implementation of the Oracle ERP system in the Company's NSP Americas segment during the second quarter of 2017. Net sales in Latin America continues to be negatively impacted by changing regulations for product registration that affect the Company's ability to sell some of its products in certain countries in Latin America. To address this, the Company continues to emphasize the IN.FORM business model, which includes products the Company anticipates will be acceptable for registration under the changing product registration requirements in Latin America, and, at the same time, ensuring its resources are aligned with this initiative.


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 NSP Russia, Central and Eastern Europe
 
Net sales related to NSP Russia, Central and Eastern Europe markets (primarily Russia, Ukraine, Poland, and Belarus), for the three and six months ended June 30, 2017, were $6.7 million and $14.3 million, respectively, compared to $6.3 million and $12.6 million for the same periods in 2016, or an increase of 6.3 percent and 13.1 percent, respectively. Active independent Managers within NSP Russia, Central and Eastern Europe totaled approximately 2,700 and 2,400 at June 30, 2017 and 2016, respectively. Active independent Distributors and customers within NSP Russia, Central and Eastern Europe totaled approximately 60,000 and 62,600 at June 30, 2017 and 2016, respectively. Net sales increased primarily as a result of the relative stabilization of Russian ruble against the U.S. dollar. Despite the increase in net sales during the period, the Company anticipates that sales in its NSP Russia, Central and Eastern Europe segment may be significantly affected by the political unrest in Ukraine and Russia, sanctions in Russia and the impact of currency devaluation. The Company continues to evaluate various options to keep the distributor base engaged, including expansion of the Company's business into additional countries in Central and Eastern Europe. The Company believes that its relationship with its local partner will provide a solid foundation for growth when the political and economic conditions stabilize in the region.
 
Synergy WorldWide
 
Synergy WorldWide reported net sales for the three and six months ended June 30, 2017, of $30.4 million and $57.7 million, respectively, compared to $33.0 million and $62.9 million for the same periods in 2016, or decreases of 8.0 percent and 8.2 percent, respectively. This decrease was primarily due to decline in sales in the segment's Asia Pacific and Europe region, offset by growth in North America. The three and six months ended June 30, 2017, were impacted by a favorable $0.1 million and $0.4 million in foreign currency exchange rate fluctuations, respectively. In local currency, net sales decreased for the three and six months ended June 30, 2017 by 8.2 percent and 8.9 percent compared to the same periods in 2016. Active independent Managers within Synergy WorldWide totaled approximately 4,100 and 3,800 at June 30, 2017 and 2016, respectively. Active independent Distributors and customers within Synergy WorldWide totaled approximately 49,000 and 56,600 at June 30, 2017 and 2016, respectively. Synergy WorldWide’s business model is operating under a traditional direct selling method.
 
Notable activity in the following markets contributed to the results of Synergy WorldWide:
 
In South Korea, net sales decreased $3.0 million and $4.8 million, or 19.3 percent and 16.9 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. In local currency, net sales for the three and six months ended June 30, 2017, decreased 21.8 percent and 19.8 percent, respectively, compared to the same periods in 2016. The decrease in local currency net sales was primarily due to a reduction in distributor engagement as well as recent geopolitical tension and economic conditions in the region. These conditions may continue for the foreseeable future and may, therefore, continue to negatively impact the Company's future financial results.
 
In Japan, net sales increased $1.5 million and $1.6 million, or 38.6 percent and 21.2 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. In local currency, net sales for the three and six months ended June 30, 2017, increased 43.0 percent and 22.1 percent, respectively, compared to the same periods in 2016. The increase in local currency net sales is primarily tied to new sales program launched in the last year that has begun to gain traction and encourage distributor engagement.
 
In Europe, net sales decreased $0.6 million and $1.0 million, or 9.5 percent and 7.5 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. In local currency, net sales for the three and six months ended June 30, 2017, decreased 7.1 percent and 4.6 percent compared to the same periods in 2016. The decrease in local currency net sales is primarily due to market saturation and a reduction in sales activity in the market's Scandinavian countries.

In North America, net sales increased approximately $0.1 million and decreased $0.1 million, or an increase of 4.1 percent and a decrease of 0.9 percent, for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. The Company is working to implement growth initiatives to more effectively attract new Distributors and provide improved training and motivation.
 

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China and New Markets
 
China and New Markets had net sales for the three and six months ended June 30, 2017, of $4.9 million and $8.4 million, respectively, compared to $5.4 million and $6.4 million for the same periods in 2016, or a decrease of 8.6 percent and an increase of 32.2 percent, respectively. The net sales decrease for the quarter is the result of prior year pre-opening product sales through Hong Kong, which began during the three months ended June 30, 2016. The year-to-date net sales increase is the result of no sales made during the first quarter of 2016. The Company received its direct selling license in China during the three months ended June 30, 2017, which allows the Company to expand its business scope to include direct selling activities within China.
   
Further information related to NSP Americas, NSP Russia, Central and Eastern Europe, Synergy WorldWide, and China and New Markets business segments is set forth in Note 8 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 was 26.1 percent for the three and six months ended June 30, 2017, respectively, compared to 25.8 percent and 26.3 percent for the same periods in 2016. The change in the cost of sale percentage for the three month period is primarily due to the change in market mix.
 
Volume Incentives
 
Volume incentives are a significant part of the Company's direct sales marketing program, and represent commission payments to independent distributors. 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 was 34.8 percent for the three and six months ended June 30, 2017, respectively, compared to 34.5 percent and 35.3 percent for the same periods in 2016. The change in volume incentives as a percent of net sales for the six month period is primarily due to change in segment market mix such as the sales growth in China and New Markets related to sales in China, occurring after the Company's receipt of its direct selling license, and pre-opening product sales through Hong Kong, for which no volume incentives are paid. Rather, in China the Company pays independent service fees which are included in selling, general and administrative expenses.
 
Selling, General and Administrative
 
Selling, general and administrative expenses represent operating expenses, components of which include labor and benefits, sales events, professional fees, travel and entertainment, marketing, occupancy costs, communications costs, bank fees, depreciation and amortization, independent services fees paid in China, and other miscellaneous operating expenses.

Selling, general and administrative expenses increased by approximately $0.6 million and $2.5 million, respectively, to $31.8 million and $62.2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Selling, general and administrative expenses were 39.1 percent and 37.8 percent of net sales for the three and six months ended June 30, 2017, respectively, compared to 35.0 percent and 34.7 percent for the same periods in 2016. The increase in selling, general and administrative expenses for the three and six months ended June 30, 2017, as compared to the same periods in 2016, was primarily related to:

•
$0.5 million and $1.8 million of increased investment in China during the three and six months ended June 30, 2017, respectively;
•
$1.2 million of increased depreciation related to the Oracle ERP implementation project incurred for the three and six months ended June 30, 2017;
•
$0.7 million reduction of reserves for product liability for the three and six months ended June 30, 2017.
 
Other Income (Expense), Net
 
Other income (expense) net, for the three and six months ended June 30, 2017, increased $1.1 million and $0.8 million, respectively, to $0.4 million and $1.7 million as compared to the same periods in 2016. The change in other income was primarily due to changes in foreign exchange gains and losses.
 

27
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Income Taxes
 
For the three months ended June 30, 2017 and 2016, the Company’s provision for income taxes, as a percentage of income before income taxes was 190.5 percent and 34.7 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent. For the six months ended June 30, 2017 and 2016, the Company’s provision for income taxes, as a percentage of income before income taxes was 61.9 percent and 43.1 percent, respectively, compared with a U.S. federal statutory rate of 35.0 percent.
 
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, was primarily attributed to current year foreign losses, primarily related to China, that presently do not provide future tax benefit, partially offset by foreign tax credit benefits.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the three months ended June 30, 2016, was attributed to foreign tax credits arising from intercompany dividends paid by foreign subsidiaries to the U.S. corporation, offset by current year foreign losses, primarily related to China, that presently do not provide future tax benefit, and unfavorable adjustments related to foreign operations.

The difference between the effective tax rate and the U.S. federal statutory tax rate for the six months ended June 30, 2016, was attributed to current year foreign losses, primarily related to China, that presently do not provide future tax benefit, and an adjustment of a prior year deferred tax assets related to foreign currency translation amounts, offset partially by foreign tax credits arising from intercompany dividends paid by foreign subsidiaries to the U.S. corporation.

Changes to the effective rate due to dividends received from foreign subsidiaries and the impact of foreign tax credits are expected to be recurring. Depending on various factors, changes from the foregoing items may be favorable or unfavorable in a particular period.
 
The Company’s U.S. federal income tax returns for 2013 through 2015 are open to examination for federal tax purposes. The Company has several foreign tax jurisdictions that have open tax years from 2010 through 2016.
 
As of June 30, 2017, the company had accrued $7.0 million related to unrecognized tax positions, compared with $6.8 million as of December 31, 2016. This net increase was primarily attributed to changes in contingencies related to international tax.
 
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 its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.  Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determination.
 
Product Categories
 
The Company’s 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 purchases herbs and other raw materials in bulk and, after rigorous quality control testing, it formulates, encapsulates, tablets or concentrates them, labels and packages them for shipment. Most products are manufactured at the Company's facility in Spanish Fork, Utah. Contract manufacturers produce some of its products in accordance with its exacting specifications and standards. The Company has implemented stringent quality control procedures to verify that its contract manufacturers have complied with its specifications and standards.

Presented below are 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 and six months ended June 30, 2017 and 2016, by business segment.
 

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Three Months Ended June 30,
2017
 
2016
NSP Americas:
 

 
 

 
 

 
 

General health
$
18,181

 
46.1
%
 
$
20,234

 
45.2
%
Immune
3,169

 
8.0

 
3,738

 
8.4

Cardiovascular
2,820

 
7.2

 
3,418

 
7.6

Digestive
11,660

 
29.6

 
11,845

 
26.5

Personal care
1,487

 
3.8

 
2,853

 
6.4

Weight management
2,104

 
5.3

 
2,637

 
5.9

Total NSP Americas
39,421

 
100.0

 
44,725

 
100.0

 
 
 
 
 
 
 
 
NSP Russia, Central and Eastern Europe:
 

 
 

 
 

 
 

General health
$
2,941

 
44.1
%
 
$
2,501

 
39.9
%
Immune
638

 
9.6

 
857

 
13.7

Cardiovascular
480

 
7.2

 
493

 
7.9

Digestive
2,030

 
30.5

 
1,407

 
22.4

Personal care
424

 
6.4

 
853

 
13.6

Weight management
149

 
2.2

 
158

 
2.5

Total NSP Russia, Central and Eastern Europe
6,662

 
100.0

 
6,269

 
100.0

 
 
 
 
 
 
 
 
Synergy WorldWide:
 

 
 

 
 

 
 

General health
$
7,624

 
25.1
%
 
$
9,694

 
29.4
%
Immune
117

 
0.4

 
41

 
0.1

Cardiovascular
12,603

 
41.5

 
13,505

 
40.9

Digestive
4,154

 
13.7