NOTE 12:  COMMITMENTS AND CONTINGENCIES

Contractual Obligations

The Company leases certain facilities and equipment used in its operations and accounts for leases with escalating payments using the straight-line method. The Company incurred expenses of approximately $6,125, $6,096 and $6,177 in connection with operating leases during 2013, 2012 and 2011, respectively. The approximate aggregate commitments under non-cancelable operating leases in effect at December 31, 2013 were as follows:

The Company enters into contracts with suppliers to ensure the availability of both botanical and non-botanical raw materials, as well as packing materials, in advance of its annual requirements. As of December 31, 2013, the Company has entered into non-cancelable purchase agreements for $43 related to fiscal year 2014 production needs.

The Company has entered into long-term agreements with third-parties in the ordinary course of business, in which it has agreed to pay a percentage of net sales in certain regions in which it operates, or royalties on certain products. In 2013, 2012 and 2011, the aggregate amounts of these payments were $1,468, $1,270 and $8,360, respectively.

In 2013, the Company began to significantly reinvest in its information technology systems. Included within this plan is an Oracle ERP implementation program to provide the Company with a single integrated software solution that will integrate the Company’s business process on a worldwide basis. The Company has committed to invest an additional $6,478 over the course of the project and anticipates completion of this project by mid-2016. This amount is expected to be paid in future years as follows: $3,134 in 2014, $3,001 in 2015, and $343 in 2016, respectively.

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.

Since late 2007, the Company has administered its sales in Belarus, Georgia, Kazakhstan, Moldova, Mongolia, Russia and Ukraine (the “Territories”) through an International Reseller Agreement (“Reseller Agreement”) with a third party general dealer (the “General Dealer”) based in Russia. The General Dealer administers the marketing and distribution of the Company’s products in the Territories.   The Reseller Agreement has a one-year term, which has been renewed annually by the parties, and is set to expire on November 1, 2014.  As a part of its services, the General Dealer provides certain discounts (the “Discounts”) to its network of dealers related to the costs associated with transporting the Company’s products from the General Dealer to the dealers.  In July 2013, the General Dealer began to withhold the amount of these Discounts from the funds remitted each month to the Company for the sale of the products, claiming that it is entitled to reimbursement for these costs under the Reseller Agreement.  These withholdings have averaged approximately $330 per month and totaled approximately $2,000 at December 31, 2013. The Company disagrees with the General Dealer’s interpretation of the Reseller Agreement and disputes any and all of the General Dealer’s reimbursement claims. While the parties have attempted to negotiate a resolution to the dispute, they have been unable to resolve the matter and the Company now plans to submit a claim for payment of the withheld funds to binding arbitration in the United Kingdom, pursuant to the terms of the Reseller Agreement. Not withstanding the annual renewal of the Reseller Agreement, the General Dealer may seek reimbursement of Discounts with respect to the periods prior to July 2013, which would total approximately $22,000. The Company believes the General Dealer’s claims are meritless and the Company intends to pursue its claims against the General Dealer.

The General Dealer is the Company’s sole general dealer in the Territories and the Company currently does not have in place any other third party or Company infrastructure capable of immediately assuming the General Dealer’s marketing and distribution obligations. Although the Company plans to continue to operate under the Reseller Agreement through the expiration of its term and is currently negotiating an extension, if the Company’s relationship with the General Dealer deteriorates or if the General Dealer ceases to provide such services in the Territories, the Company will need to identify, engage and train a new general dealer, establish its own marketing and distribution operations in the Territories, or create a hybrid model.  Any such cessation of service and subsequent transition to another third party provider, or the establishment of its own distribution operations, could result in disruption to the Company’s business in the Territories, which could have an adverse effect on the Company’s business and results of operations. The Company is committed to its Managers and Distributors in the Territories and is actively working to ensure that they will supported going forward.

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.  While there is a reasonable possibility that a material 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 $900.

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 December 31, 2013 and 2012, accrued liabilities include $6,312 and $6,207, respectively, 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 is not able at this time to predict the ultimate outcomes of those matters or to estimate the effect of the ultimate outcomes, if greater than the amounts accrued, would have on the financial condition, results of operations or cash flows of the Company.

Self-Insurance Liabilities

Similar to other manufacturers and Distributors of products that are ingested, the Company faces an inherent risk of exposure to product liability claims in the event that, among other things, the use of its products results in injury. The Company carries insurance in the types and amounts it considers reasonably adequate to cover the risks associated with its business. The Company has a wholly owned captive insurance company to provide it with product liability insurance coverage. The Company has accrued an amount that it believes is sufficient to cover probable and reasonably estimable liabilities related to product liability claims based on the Company’s history of such claims. However, there can be no assurance that these estimates will prove to be sufficient, nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on the Company’s business prospects, financial position, results of operations or cash flows.

The Company self-insures for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.

The Company reviews its self-insurance accruals on a quarterly basis and determines, based upon a review of its recent claims history and other factors, which portions of its self-insurance accruals should be considered short-term and long-term. The Company has accrued $2,811 and $2,990 for product liability and employee medical claims at December 31, 2013 and 2012, respectively, of which $526 and $532 was classified as short-term. Such amounts are included in accrued liabilities and other long-term liabilities on the Company’s consolidated balance sheets.

Government Regulations

The Company is subject to governmental regulations pertaining to product formulation, labeling and packaging, product claims and advertising, and to the Company’s direct selling system. The Company is also subject to the jurisdiction of numerous foreign tax and customs authorities. Any assertions or determinations that either the Company or the Company’s Distributors are not in compliance with existing statutes, laws, rules or regulations could potentially have a material adverse effect on the Company’s operations. In addition, in any country or jurisdiction, the adoption of new statutes, laws, rules or regulations, or changes in the interpretation of existing statutes, laws, rules or regulations could have a material adverse effect on the Company and its operations. Although management believes that the Company is in compliance, in all material respects, with the statutes, laws, rules and regulations of every jurisdiction in which it operates, no assurance can be given that the Company’s compliance with applicable statutes, laws, rules and regulations will not be challenged by foreign authorities or that such challenges will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.