e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
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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 000-30489
LIFEVANTAGE
CORPORATION
(Exact name of Registrant as specified in its charter)
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COLORADO
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90-0224471 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.) |
11545 W. Bernardo Court, Suite 301, San Diego, California 92127
(Address of principal executive offices)
(858) 312-8000
(Registrants telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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 þ 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
o 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the issuers common stock, par value $0.001 per share, as of
February 1, 2011 was 73,518,592.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this report and the information incorporated by reference
herein may contain forward-looking statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended). These statements, which involve risks and uncertainties, reflect our current
expectations, intentions, or strategies regarding our possible future results of operations,
performance, and achievements. Forward-looking statements include, without limitation: statements
regarding future products or product development; statements regarding future selling, general and
administrative costs and research and development spending; statements regarding our product
development strategy; statements regarding the future performance of our network marketing sales
channel; and statements regarding future financial performance, results of operations, capital
expenditures and sufficiency of capital resources to fund our operating requirements. These
forward-looking statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and applicable rules of the Securities and Exchange
Commission and common law.
These forward-looking statements may be identified in this report and the information
incorporated by reference by words such as anticipate, believe, could, estimate, expect,
intend, plan, predict, project, should and similar terms and expressions, including
references to assumptions and strategies. These statements reflect our current beliefs and are
based on information currently available to us. Accordingly, these statements are subject to
certain risks, uncertainties, and contingencies, which could cause our actual results, performance,
or achievements to differ materially from those expressed in, or implied by, such statements.
The following factors are among those that may cause actual results to differ materially from
our forward-looking statements:
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Limited operating history in new business model; |
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Our ability to successfully expand our operations and manage our future growth; |
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Difficulty in managing growth and expansion; |
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Dilutive effects of any potential need to raise additional capital; |
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The deterioration of global economic conditions and the decline of consumer confidence
and spending; |
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Material weaknesses reported in our internal control over financial reporting; |
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Environmental liabilities stemming from past operations and property ownership; |
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Significant dependence upon a single product; |
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Competition in the dietary supplement market; |
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The potential failure or unintended negative consequences of our network marketing sales
channel; |
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Our ability to retain independent distributors or to hire new independent distributors on
an ongoing basis; |
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The potential for government or third party actions against us resulting from independent
distributor activities that violate applicable laws or regulations; |
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The potential for third party and governmental actions involving our network marketing
sales channel; |
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Our ability to protect our intellectual property rights and the value of our product; |
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Our ability to continue to innovate and provide products that are useful to consumers; |
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The effect of current and future government regulations of the network marketing and
dietary supplement industries on our business; |
2
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The effect of unfavorable publicity on our business; |
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The potential for product liability claims against us; |
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Our dependence on third party manufacturers to manufacture our product; |
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The ability to obtain raw material for our product; |
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Our common stock is currently classified as a penny stock; |
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Our stock price may experience future volatility; |
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The illiquidity of our common stock; |
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Substantial sales of shares of our common stock; |
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Other factors not specifically described above, including the other risks, uncertainties,
and contingencies described under Description of Business, Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in
Items 1 and 7 of our Annual Report on Form 10-K for the year ended June 30, 2010. |
When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We have no obligation and do
not undertake to update or revise any such forward-looking statements to reflect events or
circumstances after the date of this report.
3
LIFEVANTAGE CORPORATION
INDEX
4
PART I Financial Information
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Item 1. |
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Financial Statements |
LIFEVANTAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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As of, |
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December 31, 2010 |
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June 30, 2010 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
2,736,172 |
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$ |
1,637,676 |
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Investments, available for sale |
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300,000 |
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340,000 |
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Accounts receivable, net |
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477,591 |
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401,597 |
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Inventory |
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930,134 |
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493,858 |
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Prepaid expenses and deposits |
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298,450 |
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153,864 |
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Total current assets |
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4,742,347 |
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3,026,995 |
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Long-term assets |
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Investments, available for sale |
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75,000 |
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85,000 |
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Property and equipment, net |
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200,073 |
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196,353 |
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Intangible assets, net |
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1,994,192 |
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2,045,471 |
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Deferred debt offering costs, net |
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394,442 |
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844,792 |
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Deposits |
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28,613 |
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28,613 |
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TOTAL ASSETS |
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$ |
7,434,667 |
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$ |
6,227,224 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities |
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Accounts payable |
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$ |
710,269 |
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$ |
770,941 |
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Commissions payable |
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796,210 |
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591,035 |
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Reserve for sales returns |
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625,730 |
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343,937 |
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Other accrued expenses |
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1,210,415 |
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809,507 |
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Customer deposits |
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38,450 |
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34,797 |
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Revolving line of credit and accrued interest |
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434,093 |
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433,985 |
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Short-term derivative liabilities |
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1,716,141 |
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1,444,331 |
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Short-term convertible debt, net of discount |
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29,445 |
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702,361 |
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Total current liabilities |
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5,560,753 |
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5,130,894 |
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Long-term liabilities |
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Deferred rent |
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24,104 |
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27,191 |
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Derivative liabilities |
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6,346,599 |
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17,123,119 |
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Convertible debt, net of discount |
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78,381 |
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121,014 |
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Total liabilities |
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12,009,837 |
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22,402,218 |
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Commitments and contingencies |
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Stockholders deficit |
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Preferred stock par value $0.001 per
share, 50,000,000 shares authorized, no
shares issued or outstanding |
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Common stock par value $0.001 per share,
250,000,000 shares authorized and 71,947,949
and 61,494,849 issued and outstanding as of
December 31, 2010 and June 30, 2010,
respectively |
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71,948 |
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61,495 |
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Additional paid-in capital |
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26,891,165 |
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21,457,145 |
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Accumulated deficit |
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(31,499,040 |
) |
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(37,661,857 |
) |
Accumulated other comprehensive loss |
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(39,243 |
) |
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(31,777 |
) |
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Total stockholders deficit |
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(4,575,170 |
) |
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(16,174,994 |
) |
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TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
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$ |
7,434,667 |
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$ |
6,227,224 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
LIFEVANTAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the three months ended |
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For the six months ended |
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December 31, |
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December 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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Sales, net |
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$ |
7,460,089 |
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$ |
2,455,646 |
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$ |
13,903,438 |
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$ |
4,313,643 |
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Cost of sales |
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1,191,534 |
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411,824 |
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2,211,669 |
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724,798 |
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Gross profit |
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6,268,555 |
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2,043,822 |
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11,691,769 |
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3,588,845 |
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Operating expenses: |
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Sales and marketing |
|
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4,020,603 |
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1,962,590 |
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7,431,446 |
|
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3,975,195 |
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General and administrative |
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1,496,069 |
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2,548,891 |
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3,003,162 |
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4,929,608 |
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Research and development |
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|
89,717 |
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|
118,522 |
|
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|
199,510 |
|
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|
225,414 |
|
Depreciation and amortization |
|
|
53,184 |
|
|
|
93,475 |
|
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|
103,900 |
|
|
|
146,773 |
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Total operating expenses |
|
|
5,659,573 |
|
|
|
4,723,478 |
|
|
|
10,738,018 |
|
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|
9,276,990 |
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|
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|
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|
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Operating income (loss) |
|
|
608,982 |
|
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(2,679,656 |
) |
|
|
953,751 |
|
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(5,688,145 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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Interest expense |
|
|
(544,282 |
) |
|
|
(741,790 |
) |
|
|
(2,008,905 |
) |
|
|
(895,490 |
) |
Change in fair value of derivative liabilities |
|
|
5,477,924 |
|
|
|
2,740,783 |
|
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|
7,312,971 |
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8,768,519 |
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Total other income |
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4,933,642 |
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1,998,993 |
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5,304,066 |
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|
7,873,029 |
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|
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Net income (loss) before income taxes |
|
|
5,542,624 |
|
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(680,663 |
) |
|
|
6,257,817 |
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|
2,184,884 |
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Income tax expense |
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(95,000 |
) |
|
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(95,000 |
) |
|
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|
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Net income (loss) |
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|
5,447,624 |
|
|
|
(680,663 |
) |
|
|
6,162,817 |
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|
2,184,884 |
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Net income (loss) per share, basic |
|
$ |
.08 |
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|
$ |
(0.01 |
) |
|
$ |
.09 |
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$ |
0.04 |
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Net income (loss) per share, diluted |
|
$ |
.06 |
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|
$ |
(0.01 |
) |
|
$ |
.07 |
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$ |
0.03 |
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Weighted average shares, basic |
|
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71,063,750 |
|
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|
56,988,549 |
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|
67,374,094 |
|
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56,896,535 |
|
Weighted average shares, diluted |
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90,969,984 |
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56,988,549 |
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|
87,837,962 |
|
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|
68,643,382 |
|
The accompanying notes are an integral part of these condensed consolidated statements.
6
LIFEVANTAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT AND COMPREHENSIVE INCOME
(UNAUDITED)
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Accumulated |
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Other |
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Common Stock |
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Additional |
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Accumulated |
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Comprehensive |
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Shares |
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Amount |
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Paid In Capital |
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Deficit |
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Loss |
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Total |
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Balances, June 30, 2010 |
|
|
61,494,849 |
|
|
$ |
61,495 |
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|
$ |
21,457,145 |
|
|
$ |
(37,661,857 |
) |
|
$ |
(31,777 |
) |
|
$ |
(16,174,994 |
) |
Conversion of debt to equity |
|
|
10,453,100 |
|
|
|
10,453 |
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|
5,271,905 |
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|
|
|
|
|
|
|
|
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|
5,282,358 |
|
Options/Warrants issued for services |
|
|
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|
|
|
|
|
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|
162,115 |
|
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|
162,115 |
|
Currency translation adjustment |
|
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(7,466 |
) |
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|
(7,466 |
) |
Net income |
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|
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6,162,817 |
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|
6,162,817 |
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Other comprehensive income |
|
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|
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|
6,155,351 |
|
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|
Balances, December 31, 2010 |
|
|
71,947,949 |
|
|
$ |
71,948 |
|
|
$ |
26,891,165 |
|
|
$ |
(31,499,040 |
) |
|
$ |
(39,243 |
) |
|
$ |
(4,575,170 |
) |
|
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|
7
LIFEVANTAGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the six months ended |
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December 31, |
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2010 |
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|
2009 |
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Cash Flows from Operating Activities: |
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Net income |
|
$ |
6,162,817 |
|
|
$ |
2,184,884 |
|
Adjustments to reconcile net loss to net cash (used) by operating activities: |
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Depreciation and amortization |
|
|
103,900 |
|
|
|
146,774 |
|
Stock based compensation to employees |
|
|
132,517 |
|
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|
929,205 |
|
Stock based compensation to non-employees |
|
|
29,598 |
|
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|
724,325 |
|
Amortization of debt discount |
|
|
1,375,071 |
|
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|
741,045 |
|
Amortization of deferred offering costs |
|
|
450,350 |
|
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|
44,591 |
|
Non-cash interest expense |
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|
108 |
|
|
|
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|
Change in fair value of derivative liabilities |
|
|
(7,312,971 |
) |
|
|
(8,768,519 |
) |
Changes in operating assets and liabilities: |
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|
|
|
|
|
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|
(Increase) decrease in accounts receivable |
|
|
(75,994 |
) |
|
|
420,843 |
|
(Increase) decrease in inventory |
|
|
(436,276 |
) |
|
|
52,134 |
|
(Increase) in prepaid expenses |
|
|
(140,934 |
) |
|
|
(69,057 |
) |
Decrease in deposits and other assets |
|
|
|
|
|
|
21,486 |
|
(Decrease) in accounts payable |
|
|
(60,672 |
) |
|
|
(24,773 |
) |
Increase in accrued expenses |
|
|
884,789 |
|
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|
339,302 |
|
|
|
|
|
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|
Net Cash Provided (Used) by Operating Activities |
|
|
1,112,303 |
|
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|
(3,257,760 |
) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Redemption of marketable securities |
|
|
50,000 |
|
|
|
75,000 |
|
Purchase of intangible assets |
|
|
(10,651 |
) |
|
|
(22,834 |
) |
Purchase of equipment |
|
|
(45,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used) Provided by Investing Activities |
|
|
(6,341 |
) |
|
|
52,166 |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Net (payments) on proceeds from revolving line of credit and accrued interest |
|
|
|
|
|
|
(146,410 |
) |
Borrowings on long-term obligations |
|
|
|
|
|
|
756,635 |
|
Issuance of convertible debt and warrants |
|
|
|
|
|
|
1,377,143 |
|
Receivable from equity raise |
|
|
|
|
|
|
119,750 |
|
Principal payments under capital lease obligation |
|
|
|
|
|
|
(30,783 |
) |
Issuance of common stock and warrants |
|
|
|
|
|
|
904,256 |
|
Exercise of options and warrants |
|
|
|
|
|
|
32,378 |
|
Private placement fees |
|
|
|
|
|
|
(130,714 |
) |
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities |
|
|
|
|
|
|
2,882,255 |
|
Foreign Currency Effect on Cash |
|
|
(7,466 |
) |
|
|
(3,777 |
) |
Increase (Decrease) in Cash and Cash Equivalents: |
|
|
1,098,496 |
|
|
|
(327,116 |
) |
Cash and Cash Equivalents beginning of period |
|
|
1,637,676 |
|
|
|
608,795 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents end of period |
|
$ |
2,736,172 |
|
|
$ |
281,679 |
|
|
|
|
|
|
|
|
Non Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Warrants issued for agent fees and reclassification of warrants to a derivative liability |
|
$ |
|
|
|
$ |
122,508 |
|
Conversion of debt to common stock |
|
$ |
2,090,620 |
|
|
$ |
30,000 |
|
Conversion of derivative to common stock |
|
$ |
3,191,738 |
|
|
$ |
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for interest expense |
|
$ |
202,972 |
|
|
$ |
46,204 |
|
Cash paid for income taxes |
|
$ |
56,000 |
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated statements.
8
LIFEVANTAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED DECEMBER 31, 2010 AND 2009
(UNAUDITED)
These unaudited Condensed Consolidated Financial Statements and Notes should be read in
conjunction with the audited financial statements and notes of LifeVantage Corporation as of and
for the year ended June 30, 2010 included in our annual report on Form 10-K.
Note 1 Organization and Basis of Presentation:
The condensed consolidated financial statements included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). In the opinion of the management of LifeVantage Corporation (LifeVantage or the
Company), these interim Financial Statements include all adjustments, consisting of normal
recurring adjustments, that are considered necessary for a fair presentation of our financial
position as of December 31, 2010, and the results of operations for the three and six month periods
ended December 31, 2010 and 2009 and the cash flows for the six month periods ended December 31,
2010 and 2009. Interim results are not necessarily indicative of results for a full year or for any
future period. Certain prior period amounts have been reclassified to conform to our current period
presentation.
The condensed consolidated financial statements and notes included herein are presented as
required by Form 10-Q, and do not contain certain information included in our audited financial
statements and notes for the fiscal year ended June 30, 2010 pursuant to the rules and regulations
of the SEC. For further information, refer to the financial statements and notes thereto as of and
for the year ended June 30, 2010, and included in the Annual report on Form 10-K on file with the
SEC.
Note 2 Summary of Significant Accounting Policies:
Consolidation
The accompanying financial statements include the accounts of LifeVantage Corporation and our
wholly-owned subsidiaries Lifeline Nutraceuticals Corporation (LNC), LifeVantage de México, S. de
R.L. de C.V. (Limited Liability Company), Importadora LifeVantage, S. de R.L. de C.V. (Limited
Liability Company), and Servicios Administrativos para la Importación de Productos Body & Skin,
S.C. All inter-company accounts and transactions between the entities have been eliminated in
consolidation.
Translation of Foreign Currency Statements
We translate the financial statements of our foreign entities by using the current exchange
rate. For assets and liabilities, the exchange rate at the balance sheet date is used. For any
investment in subsidiaries and retained earnings, the historical exchange rate is used. For
revenue, expenses, gains, and losses, an appropriately weighted average exchange rate for the
period is used.
Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting of
revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities
to prepare these consolidated financial statements. Actual results could differ from those
estimates.
Fair Value Measurements
Fair value measurement requirements are embodied in certain accounting standards applied in
the preparation of our financial statements. Significant fair value measurements include our
embedded derivative liabilities. See Notes 4 and 6 Convertible Debentures and Stockholders
Equity for disclosures related to our convertible debentures and common stock and warrant financing
arrangements. The fair value hierarchy is defined below:
9
Fair value hierarchy:
(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities.
(2) Level 2 inputs are inputs which include quoted prices for similar assets and liabilities
in active markets and inputs that are observable for the assets or liabilities, either directly or
indirectly, for substantially the full term of the financial instrument.
(3) Level 3 inputs are unobservable inputs and significant to the fair value measurement.
The financial instruments level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement.
The summary of fair values of financial instruments is as follows at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Carrying |
|
|
|
|
|
|
Valuation |
|
Instrument: |
|
value |
|
|
Value |
|
|
Level |
|
|
Methodology |
|
Investments |
|
$ |
375,000 |
|
|
$ |
375,000 |
|
|
|
2 |
|
|
Market price |
Derivative warrant liabilities |
|
$ |
5,893,631 |
|
|
$ |
5,893,631 |
|
|
|
3 |
|
|
Black-Scholes |
Embedded conversion liability |
|
$ |
2,169,109 |
|
|
$ |
2,169,109 |
|
|
|
3 |
|
|
Lattice model |
The summary of fair values of financial instruments is as follows at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Carrying |
|
|
|
|
|
|
Valuation |
|
Instrument: |
|
value |
|
|
Value |
|
|
Level |
|
|
Methodology |
|
Investments |
|
$ |
425,000 |
|
|
$ |
425,000 |
|
|
|
2 |
|
|
Market price |
Derivative warrant liabilities |
|
$ |
10,573,084 |
|
|
$ |
10,573,084 |
|
|
|
3 |
|
|
Black-Scholes |
Embedded conversion liability |
|
$ |
7,994,366 |
|
|
$ |
7,994,366 |
|
|
|
3 |
|
|
Lattice model |
The following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) during the six months ended December 31, 2010 and the year ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
June 30, 2010 |
|
Beginning balance: Derivative liabilities |
|
$ |
18,567,450 |
|
|
$ |
8,429,710 |
|
Total (gains) losses |
|
|
(7,312,971 |
) |
|
|
(3,101,673 |
) |
Adoption of change in accounting principle |
|
|
|
|
|
|
3,267,253 |
|
Purchases, sales, issuances and settlements, net |
|
|
(3,191,739 |
) |
|
|
9,972,160 |
|
|
|
|
|
|
|
|
Ending balance: Derivative liabilities |
|
$ |
8,062,740 |
|
|
$ |
18,567,450 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
We consider only our monetary liquid assets with original maturities of three months or less
as cash and cash equivalents.
Accounts Receivable
Accounts receivable at December 31, 2010 consist primarily of credit card receivables
including a percentage holdback by the credit card processor. The holdback balance at December 31,
2010 was $432,246. Based on the Companys verification process for customer credit cards and
historical information available, management has determined that an allowance for doubtful accounts
on credit card sales related to its direct and independent distributor sales as of December 31,
2010 is not necessary. No bad debt expense has been recorded for the six months ended December 31,
2010 or the year ended June 30, 2010.
Investments
In 2008 we invested in auction rate preferred securities of closed-end funds (ARPS) to
maximize interest income. We have classified these investments as available for sale in the balance
sheet.
10
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. We have capitalized payments to our contract product manufacturer for
the acquisition of raw materials and commencement of the manufacturing, bottling and labeling of
our product. As of December 31, 2010 and June 30, 2010, inventory consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
June 30, 2010 |
|
Finished goods |
|
$ |
377,860 |
|
|
$ |
326,095 |
|
Raw materials |
|
|
552,274 |
|
|
|
167,763 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
930,134 |
|
|
$ |
493,858 |
|
|
|
|
|
|
|
|
Deferred Offering Costs
Deferred offering costs consist of cash paid to and the fair value of warrants issued to
placement agents in conjunction with our convertible debenture financings. Amortization of these
costs commence upon the closing date and continue for the life of the convertible debenture
instruments.
As of December 31, 2010 and June 30, 2010, deferred offering costs consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2010 |
|
|
2010 |
|
Deferred offering costs |
|
$ |
1,370,212 |
|
|
$ |
1,370,212 |
|
Amortization of deferred offering costs |
|
|
(975,770 |
) |
|
|
(525,420 |
) |
|
|
|
|
|
|
|
Deferred offering costs, net |
|
$ |
394,442 |
|
|
$ |
844,792 |
|
|
|
|
|
|
|
|
Revenue Recognition
We ship the majority of our product directly to the consumer via UPS and receive substantially
all payment for these sales in the form of credit card charges. Revenue from direct product sales
to customers is recognized upon passage of title and risk of loss to customers when product is
shipped from the fulfillment facility. Sales revenue and estimated returns are recorded when
product is shipped. Our return policy is to provide a 30-day money back guarantee on orders placed
by customers. After 30 days, we do not issue refunds to direct sales customers for returned
product. In the network marketing sales channel, we allow terminating distributors to return
unopened unexpired product that they have purchased within the prior twelve months, subject to
certain consumption limitations. To date, returns from terminating distributors have been
negligible. We have experienced overall monthly returns of approximately 3% of sales. Our return
rate for sales directly to consumers, which excludes sales through our network marketing channel is
approximately 1% of sales based on historical experience and our return rate for sales through our
network marketing channel is approximately 4% of sales based upon our historical experience and
network marketing industry experience. As of December 31, 2010 and June 30, 2010, our reserve
balance for returns and allowances was $625,730 and $343,937, respectively.
Income/(Loss) per share
Basic income or loss per share is computed by dividing the net income or loss by the weighted
average number of common shares outstanding during the period. Diluted earnings per common share
are computed by dividing net income by the weighted average common shares and potentially dilutive
common share equivalents. For the three and six month periods ended December 31, 2010 the effects
of approximately 40.9 million and 40.6 million common shares, respectively, issuable pursuant to
warrants issued in our private placement offerings, compensation based warrants issued and options
granted through our 2007 Long-Term Incentive Plan are not included in computations because their
effect was anti-dilutive. For the three month period ended December 31, 2009 the basic and diluted
average outstanding shares are the same since including the additional potential common share
equivalents would have an antidilutive effect on the loss per share calculation. For the six month
period ended December 31, 2009 the effects of approximately 48.4 million common shares issuable
pursuant to the convertible debentures and warrants issued in our private placement offerings,
compensation based warrants issued and options granted through our 2007 Long-Term Incentive Plan
are not included in computations because their effect was anti-dilutive.
11
Segment Information
Our operations are aggregated into a single reportable operating segment based upon similar
economic and operating characteristics as well as similar markets. Our operations are also subject
to similar regulatory environments. We conduct our
operations in the U.S., Japan and Mexico. Substantially all long-lived assets are located in
the U.S. Revenues by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
|
Six months ended December 31, 2010 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues from unaffiliated customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
5,796,985 |
|
|
$ |
2,392,838 |
|
|
$ |
10,945,062 |
|
|
$ |
4,250,835 |
|
Japan operations |
|
|
1,589,466 |
|
|
|
|
|
|
|
2,830,797 |
|
|
|
|
|
Mexico operations |
|
|
73,638 |
|
|
|
62,808 |
|
|
|
127,579 |
|
|
|
62,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
7,460,089 |
|
|
$ |
2,455,646 |
|
|
$ |
13,903,438 |
|
|
$ |
4,313,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Costs
We expense all costs related to research and development activities as incurred. Research and
development expenses for the six month periods ended December 31, 2010 and 2009 were $199,510 and
$225,414, respectively.
Shipping and Handling
Shipping and handling costs associated with inbound freight and freight out to customers,
including independent distributors, are included in cost of sales. Shipping and handling fees
charged to all customers are included in sales.
Stock-Based Compensation
In certain circumstances, we issued common stock for invoiced services and in other similar
situations to pay contractors and vendors. Payments in equity instruments to non-employees for
goods or services are accounted for using the fair value of whichever is more reliably measurable:
(a) the goods or services received; or (b) the equity instruments issued.
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks. However, we have entered into certain other financial instruments and contracts,
such as freestanding warrants and embedded conversion features on convertible debt instruments that
are not afforded equity classification. These instruments are required to be carried as derivative
liabilities, at fair value, in our consolidated financial statements.
Derivative financial instruments consist of financial instruments or other contracts that
contain a notional amount and one or more underlying variables (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement. Derivative
financial instruments may be free-standing or embedded in other financial instruments. Further,
derivative financial instruments are initially, and subsequently, measured at fair value and
recorded as liabilities or, in rare instances, assets.
We estimate fair values of derivative financial instruments using various techniques that are
considered to be consistent with the objective measurement of fair values. In selecting the
appropriate technique, we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. For less complex derivative
instruments, such as freestanding warrants, we generally use the Black Scholes Merton option
valuation technique, adjusted for the effect of dilution, because it embodies all of the requisite
assumptions (including trading volatility, estimated terms, and risk free rates) necessary to fair
value these instruments. For embedded conversion features we generally use a lattice technique
because it contains all the requisite assumptions to value these features. Estimating fair values
of derivative financial instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the instrument with related
changes in internal and external market factors. In addition, option-based techniques are highly
volatile and sensitive to changes in the trading market price of our common stock. Since derivative
financial instruments are initially and subsequently carried at fair values, our income or loss
will reflect the volatility in changes to these estimates and assumptions.
12
Convertible Debt Instruments
We issued convertible debt in September and October 2007, November and December 2009 and
January and February 2010. We review the terms of convertible debt and equity instruments that we
issue to determine whether there are embedded derivative instruments, including the embedded
conversion options that are required to be bifurcated and accounted for separately as derivative
instrument liabilities. Also, in connection with the sale of convertible debt and equity
instruments, we may issue freestanding options
or warrants that may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity. For option-based derivative financial instruments, we use the
Black-Scholes option pricing model to value the derivative instruments. For embedded conversion
derivatives we use a lattice model to value the derivative.
When the embedded conversion option in a convertible debt instrument is not required to be
bifurcated and accounted for separately as a derivative instrument, we review the terms of the
instrument to determine whether it is necessary to record a beneficial conversion feature. When the
effective conversion rate of the instrument at the time it is issued is less than the fair value of
the common stock into which it is convertible, we recognize a beneficial conversion feature, which
is credited to equity and reduces the initial carrying value of the instrument.
When convertible debt is initially recorded at less than its face value as a result of
allocating some or all of the proceeds received to derivative instrument liabilities, to a
beneficial conversion feature or to other instruments, the discount from the face amount, together
with the stated interest on the convertible debt, is amortized over the life of the instrument
through periodic charges to income, using the effective interest method.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities from a change in tax rates is recognized in income in the period that includes the
effective date of the change. As of December 31, 2010 we have recognized income tax expense of
$95,000 which is our estimated state income tax liability for the six months ended December 31,
2010. Realization of our deferred tax asset is dependent upon future earnings in specific tax
jurisdictions, the timing and amount of which are uncertain. We continue to evaluate the
realizability of the deferred tax asset, based upon achieved and estimated future results. If it is
determined that it is more likely than not that the deferred tax asset will be realized, we will
reverse all or a portion of the allowance as deemed appropriate. The difference between the
effective rate of 1.71% and the Federal statutory rate of 34% is due to the change in our valuation allowance account, State income taxes (net of federal benefit), and certain permanent differences
between our taxable and book income.
Effective January 1, 2009, we account for any uncertainty in income taxes by recognizing the
tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the
position. We measure the tax benefits recognized in the financial statements from such a position
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution. The application of income tax law is inherently complex. As such, we are required to
make certain subjective assumptions and judgments regarding income tax exposures. The result of the
reassessment of our tax positions did not have an impact on the consolidated financial statements.
Concentration of Credit Risk
We disclose significant concentrations of credit risk regardless of the degree of such risk.
Financial instruments with significant credit risk include cash and investments. At December 31,
2010, we had $2,419,787 in cash accounts at one financial institution, approximately $110,831 in
foreign bank accounts and $205,554 in an investment management account at another financial
institution. The maximum loss that would have resulted from concentration risk totaled $787,147 at
December 31, 2010 and $717,618 at June 30, 2010 for the excess of the deposit liabilities reported
by the banks over the amounts that would have been covered by federal insurance.
Effect of New Accounting Pronouncements
We have reviewed recently issued, but not yet effective, accounting pronouncements and do not
believe any such pronouncements will have a material impact on our financial statements.
Note 3 Investments
In 2008 we invested in auction rate preferred securities of closed-end funds (ARPS) to
maximize interest income. We considered investments in these instruments as available for sale in
accordance with relevant accounting guidance.
13
ARPS have historically been liquid but have been adversely affected by the broader
national liquidity crisis. We entered into
an agreement with our investment advisor, Stifel Nicolaus, to repurchase 100% of the remaining
ARPS at par on or prior to June 30, 2012. The schedule for repurchase of remaining ARPS by Stifel
Nicolaus over the next three years is as follows:
|
(a) |
|
The greater of 10 percent or $25,000 to be completed by June 30, 2011; |
|
|
(b) |
|
The balance of outstanding ARPS, if any, to be repurchased by June 30, 2012. |
We have established a line of credit to borrow against 80% of these investments so that sales
of these securities would not have to occur in order to fund our operating needs. The interest on
amounts borrowed has been approximately the same as the interest being earned from the underlying
securities. Management classified 80% or $300,000 of our investments as short term. The remaining
20% or $75,000 of our investments that may not be available in the current year are classified as
long-term.
As of December 31, 2010, in light of the plan for repurchase and the repurchases made during
the year, management has determined that there has not been a change in the fair value of the
securities owned. We have not recorded any impairment related to these investments, as management
does not believe that the underlying credit quality of the assets has been impacted by the reduced
liquidity of these investments. In addition, no unrealized gain or loss has been recorded on these
assets. We consider the inputs to valuation of these securities as level 2 inputs in the fair value
hierarchy.
Note 4 Convertible Debentures
2007
On September 26, 2007 and October 31, 2007, we issued convertible debentures in a private
placement offering that had an interest rate of 8 percent per annum and had a term of three years.
The convertible debentures were convertible into common stock at $0.20 per share during their term
and at maturity, at our option, were repayable in full or convertible into common stock at the
lower of $0.20 per share or the average trading price for the 10 days immediately prior to the
maturity date on September 26, 2010 and October 31, 2010. We also issued warrants to purchase
shares of our common stock at $0.30 per share in the private placement offering. We allocated the
proceeds received in the private placement to the convertible debentures and warrants to purchase
common stock based on their relative estimated fair values. The discount from the face amount of
the convertible debentures represented by the value initially assigned to any associated warrants
and derivative liabilities was amortized over the period to the due date of each convertible debenture,
using the effective interest method. We redeemed all warrants issued in the offering in fiscal
2009.
Details of the issuances are in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount |
|
|
|
|
|
|
Face |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized at |
|
|
Net Value at |
|
|
|
Value |
|
|
Debt |
|
|
Face Value |
|
|
Discount |
|
|
December 31, |
|
|
December 31, |
|
Date Issued |
|
Issued |
|
|
Discount |
|
|
Converted |
|
|
Converted |
|
|
2010 |
|
|
2010 |
|
September 26, 2007 |
|
$ |
1,075,000 |
|
|
$ |
(937,510 |
) |
|
$ |
(1,075,000 |
) |
|
$ |
242,173 |
|
|
$ |
695,337 |
|
|
$ |
|
|
October 31, 2007 |
|
|
415,000 |
|
|
|
(378,235 |
) |
|
|
(415,000 |
) |
|
|
139,624 |
|
|
|
238,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,490,000 |
|
|
$ |
(1,315,745 |
) |
|
$ |
(1,490,000 |
) |
|
$ |
381,797 |
|
|
$ |
933,948 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 all the convertible debentures issued in September and October of 2007
have been converted.
We determined that the conversion option in the convertible debentures did not satisfy the
definition of being indexed to our own stock, as an anti-dilution provision in the convertible
debentures would have reduced the conversion price dollar for dollar if we were to have issued
common stock with a price lower than the conversion price of the convertible debentures. Based on
authoritative guidance effective on July 1, 2009 the embedded conversion option in the convertible
debentures was a liability as of July 1, 2009. We have bifurcated the embedded conversion option
from the host contract and accounted for this feature as a separate derivative liability. As of
December 31, 2010 the embedded conversion option had a zero value because all debentures have been
converted.
In addition, we have reviewed the terms of the convertible debentures to determine whether
there are any other embedded derivative instruments that may be required to be bifurcated and
accounted for separately as derivative instrument liabilities and have determined that either they
did not meet the criteria or were immaterial in amount.
14
Effective interest associated with the convertible debentures totaled $16,632 and $240,684 for
the three and six months ended December 31, 2010, respectively. Effective interest associated with
the convertible debentures totaled $147,955 and $306,703 for the
three and six months ended December 31, 2009, respectively. Effective interest is accreted to
the balance of convertible debt until maturity. Simple interest paid totaled $1,102 and $18,046 for
the three and six months ended December 31, 2010, respectively. Simple interest paid totaled
$22,795 and $46,204 for the three and six months ended December 31, 2009, respectively. A total of
$256,568 was paid for commissions and expenses incurred in the 2007 private placement offering
which was amortized into interest expense over the term of the convertible debentures on a
straight-line basis. As of December 31, 2010 we have recorded accumulated amortization of 2007
deferred offering costs of $231,552.
2009 and 2010
Between November 2009 and February 2010, we issued convertible debentures with an aggregate
principal amount of $4,995,000 that bear interest at 8 percent per annum and have a term of two
years. Accordingly, as of December 31, 2010, these amounts are recorded as long-term convertible
debt on the accompanying balance sheet. We received aggregate net cash proceeds of $4,035,687,
after deducting placement fees of $464,313 and taking into account the conversion of an outstanding
note payable as described below. The convertible debentures are convertible into common stock at
$0.20 per share during their term. Subject to meeting certain equity conditions, we have the option
to redeem the outstanding principal plus accrued interest for cash at any time during the term of
the debentures. In conjunction with these convertible debentures we issued warrants to purchase an
aggregate of 14,997,449 shares of common stock with an exercise price of $0.50 per share and
warrants to purchase an aggregate of 2,035,860 shares of common stock with an exercise price of
$0.20 per share. In addition, a note payable to a related party in the amount of $500,000 was
converted to a convertible debenture. We allocated the proceeds received in the private placements
to the embedded derivative and warrants based on their estimated fair values. Details of the
issuances are in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount |
|
|
|
|
|
|
Face |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized at |
|
|
Net Value at |
|
|
|
Value |
|
|
Debt |
|
|
Face Value |
|
|
Discount |
|
|
December 31, |
|
|
December 31, |
|
Date Issued |
|
Issued |
|
|
Discount |
|
|
Converted |
|
|
Converted |
|
|
2010 |
|
|
2010 |
|
November 18, 2009 |
|
$ |
246,896 |
|
|
$ |
(246,896 |
) |
|
$ |
(169,830 |
) |
|
$ |
168,578 |
|
|
$ |
3,311 |
|
|
$ |
2,059 |
|
December 11, 2009 |
|
|
874,125 |
|
|
|
(874,125 |
) |
|
|
(199,800 |
) |
|
|
198,354 |
|
|
|
20,719 |
|
|
|
19,273 |
|
December 31, 2009 |
|
|
254,745 |
|
|
|
(254,745 |
) |
|
|
|
|
|
|
|
|
|
|
8,114 |
|
|
|
8,114 |
|
January 20, 2010 |
|
|
1,255,743 |
|
|
|
(1,255,743 |
) |
|
|
(259,740 |
) |
|
|
257,547 |
|
|
|
37,434 |
|
|
|
35,241 |
|
February 4, 2010 |
|
|
1,849,149 |
|
|
|
(1,849,149 |
) |
|
|
(559,440 |
) |
|
|
556,570 |
|
|
|
38,034 |
|
|
|
35,164 |
|
February 25, 2010 |
|
|
514,342 |
|
|
|
(514,342 |
) |
|
|
(326,530 |
) |
|
|
322,627 |
|
|
|
11,878 |
|
|
|
7,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,995,000 |
|
|
$ |
(4,995,000 |
) |
|
$ |
(1,515,340 |
) |
|
$ |
1,503,676 |
|
|
$ |
119,490 |
|
|
$ |
107,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 the convertible debentures are convertible into an aggregate of
17,398,300 shares with a value as of December 31, 2010 of $6,785,337 which exceeds the principal
value by $3,305,677.
Based on authoritative guidance effective on July 1, 2009 we have concluded that the embedded
conversion option in the convertible debentures is required to be bifurcated from the host contract
and accounted for this feature as a separate derivative liability, at fair value, in our financial
statements. In addition, we determined that the warrants issued in conjunction with the convertible
debentures are required to be carried as derivative liabilities, at fair value, in our financial
statements, due to certain anti-dilution provisions. As of December 31, 2010, the embedded
conversion option is estimated to be $2,169,109 and the warrant derivative is estimated to be
$4,884,283. In addition, we have reviewed the terms of the
convertible debentures to determine whether there are any other embedded derivative instruments
that may be required to be bifurcated and accounted for separately as derivative instrument
liabilities and have determined that either they did not meet the criteria or were immaterial in
amount.
Effective interest associated with the convertible debentures totaled $383,590 and $1,337,357
for the three and six month periods ended December 31, 2010, respectively. Effective interest
associated with the convertible debentures totaled $45,107 for the three and six month periods
ended December 31, 2009, respectively. Effective interest is accreted to the balance of convertible
debt until maturity. Simple interest paid was $87,906 and $184,925 for the three and six month
periods ended December 31, 2010, respectively. We incurred an aggregate of $1,138,660 in
commissions and expenses in connection with the 2009 private placement offerings, $464,313 of which
was paid in cash and the balance of which was reflected in the issuance of warrants with a fair
market value of $674,347. The $1,138,660 in commissions and expenses is being amortized into
interest expense over the term of the convertible debentures. As of December 31, 2010 we have
recorded accumulated amortization of deferred offering costs of $744,218.
15
Note 5 Line of Credit
We established a line of credit to borrow up to 80% of our investments. As of December 31,
2010, we can borrow up to $600,000. The line is collateralized by our auction rate securities. The
interest rate charged through December 31, 2010, 3.00 percent, is 0.25 percentage points below the
published Wall Street Journal Prime Rate, which was 3.25 percent as of December 31, 2010. At
December 31, 2010, we have borrowed approximately $434,093, including accrued interest, from the
line.
Note 6 Stockholders Equity
During the three and six months ended December 31, 2010 we issued 2,307,225 and 10,453,100,
respectively, shares of common stock as a result of conversions of convertible debentures.
Our Articles of Incorporation authorize the issuance of preferred shares. However, as of
December 31, 2010, none have been issued nor have any rights or preferences been assigned to the
preferred shares by our Board of Directors.
Note 7 Stock-based Compensation
We adopted and the shareholders approved the 2007 Long-Term Incentive Plan (the 2007 Plan),
effective November 21, 2006, to provide incentives to certain eligible employees, directors and
consultants. A maximum of 10,000,000 shares of our common stock can
be issued under the 2007 Plan in
connection with the grant of awards. Awards to purchase common stock have been granted pursuant to
the 2007 Plan and are outstanding to various employees, officers, directors, independent
distributors and Scientific Advisory Board (SAB) members at prices between $0.21 and $0.76 per
share, vesting over one- to three-year periods. Awards expire in accordance with the terms of each
award and the shares subject to the award are added back to the 2007 Plan upon expiration of the award.
As of December 31, 2010, awards for the purchase of an aggregate of 8,473,731 shares of our common
stock are outstanding under the 2007 Plan.
We adopted and the shareholders approved the 2010 Long-Term Incentive Plan (the 2010 Plan),
effective September 27, 2010, to provide incentives to certain eligible employees, directors and
consultants. A maximum of 3,500,000 shares of our common stock can be issued under the 2010 Plan
in connection with the grant of awards. As of December 31, 2010 there were no awards outstanding
under the 2010 Plan.
Payments in equity instruments for goods or services are accounted for under the guidance of
share based payments, which require use of the fair value method. We have adjusted the expense for
the anticipated forfeitures. Compensation based options totaling none and 58,000 were granted for
the three and six month periods ended December 31, 2010, respectively. Compensation based options
totaling 621,500 and 1,377,500 were granted during the three and six month periods ended December
31, 2009, respectively.
For the three and six months ended December 31, 2010, stock based compensation of $46,958 and
$162,115, respectively, was reflected as an increase to additional paid in capital. Of the stock
based compensation for the three and six months ended December 31, 2010, $46,958 and $132,517
respectively, was employee related and none and $29,598, respectively, was non-employee related.
For the three and six months ended December 31, 2009, stock based compensation of $851,281 and
$1,653,530, respectively, was reflected as an increase to additional paid in capital. Of the stock
based compensation for the three and six months ended December 31, 2009, $490,338 and $929,205
respectively, was employee related and $360,943 and $724,325 respectively, was non-employee
related.
Compensation expense was calculated using the fair value method during the three and six month
periods ended December 31, 2010 and 2009 using the Black-Scholes option pricing model. The
following assumptions were used for options and warrants granted during the six month periods ended
December 31, 2010 and 2009:
|
1. |
|
risk-free interest rates of between 1.33 and 1.62 percent for the six months ended
December 31, 2010 and 3.52 percent for the six months ended December 31, 2009; |
|
|
2. |
|
dividend yield of -0- percent; |
|
|
3. |
|
expected life of 3 to 6 years; and |
|
|
4. |
|
a volatility factor of the expected market price of our common stock of between 128
and 129 percent for the six months ended December 31, 2010
between 160 and 337 percent for the six
months ended December 31, 2009. |
16
Note 8 Subsequent Events
In January 2011 we granted 919,500 options under our 2007 and 2010 Long-Term Incentive plans.
Between January 1, 2011 and February 1, 2011 we issued 1,570,943 shares of common stock as a result
of option and warrant exercises and conversions of debentures.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements within the meaning of the
federal securities laws. We urge you to carefully review our description and examples of
forward-looking statements included in the section entitled Cautionary Note Regarding
Forward-Looking Statements at the beginning of this report. Forward-looking statements speak only
as of the date of this report and we undertake no obligation to publicly update any forward-looking
statements to reflect new information, events or circumstances after the date of this report.
Actual events or results may differ materially from such statements. In evaluating such statements,
we urge you to specifically consider various factors identified in this report, including the
matters set forth below in Part II, Item 1A of this report, any of which could cause actual results
to differ materially from those indicated by such forward-looking statements. The following
discussion and analysis should be read in conjunction with the accompanying financial statements
and related notes, as well as the Financial Statements and related notes in our Annual report on
Form 10-K for the fiscal year ended June 30, 2010 and the risk factors discussed therein.
Overview
This managements discussion and analysis reviews the financial condition and results of
operations of LifeVantage Corporation (the Company, LifeVantage, or we, us or our) and
its wholly-owned subsidiaries Lifeline Nutraceuticals Corporation (LNC), LifeVantage de México,
S. de R.L. de C.V. (Limited Liability Company), Importadora LifeVantage, S. de R.L. de C.V.
(Limited Liability Company), and Servicios Administrativos para la Importación de Productos Body &
Skin, S.C.
We are a dietary supplement company that manufactures, markets, distributes, and sells
Protandim, a patented dietary supplement intended to increase the bodys natural antioxidant
protection by inducing multiple protective enzymes including superoxide dismustase (SOD) and
catalase (CAT) through network marketing and direct-to-consumer sales channels. We also sell our
LifeVantage TrueScience Anti-Aging Cream, a skin care product, through the same channel.
Our revenue depends significantly upon the number and productivity of our independent
distributors. Independent distributors market and sell our products and recruit new distributors
based on the distinguishing benefits and innovative characteristics of our products. We have
developed a distributor compensation plan and other incentives designed to motivate our independent
distributors to market and sell our products and to build sales organizations. If we experience
delays or difficulties in introducing compelling products or attractive initiatives to independent
distributors, this can have a negative impact on our revenue and harm our business.
We primarily sell a single product, Protandim, and in June 2009 we began selling our
LifeVantage TrueScience Anti-Aging Cream (LifeVantage TrueScience) which incorporates
ingredients contained in Protandim and other proprietary ingredients. We developed Protandim, a
proprietary blend of ingredients that combats oxidative stress by increasing the bodys natural
antioxidant protection at the genetic level, inducing the production of naturally occurring
protective antioxidant enzymes including SOD, CAT, and glutathione synthase.
We sell Protandim and LifeVantage TrueScience through our network marketing sales channel
utilizing independent distributors and directly to individuals through our preferred customer
program.
To date, we have focused our research efforts on investigating various aspects and
consequences of the imbalance of oxidants and antioxidants, an abnormality, which is a central
underlying feature in many disorders. We intend to continue our research, development, and
documentation of the efficacy of Protandim to provide credibility to the market. We also anticipate
undertaking research, development, testing, and licensing activities in an effort to
introduce additional products in the future, although we may not be successful in this endeavor.
17
Ongoing research and development projects involving Protandim are currently in various stages
of completion with several institutions including the University of Colorado at Denver Health
Science Center, University of Minnesotas Masonic Cancer Center, Ohio State University, University
Hospital in Brno, Czech Republic, University of Michigan and Louisiana State University. The
studies relate to various conditions including pulmonary hypertension, non-alcoholic fatty liver
disease, Duchenne muscular dystrophy, coronary artery bypass graft failure, renal failure,
diabetes, and photoaging of the skin. The recently completed and published peer-reviewed mouse
study at Louisiana State University found a significant increase in the expression levels of SOD
and catalase enzymes and tumor incidence and multiplicity were reduced in mice fed a Protandim®
diet by 33% and 57%, respectively, compared with mice on a basal diet. Another study, conducted by
a prominent dermatologist using Protandim®, is examining the relationship between anti-aging and
the skins natural ability to rejuvenate at the cellular level.
Net revenue from Protandim®, TrueScience®and related marketing materials totaled $7,460,089
and $13,903,438, respectively, for the three and six months ended December 31, 2010, and $2,455,646
and $4,313,643, respectively, for the three and six months ended December 31, 2009.
Three and Six Months Ended December 31, 2010 Compared to Three and Six Months Ended December 31,
2009
Revenue We generated net revenue of $7,460,089 during the three months ended December
31, 2010, and generated net revenue of $2,455,646 during the three months ended December 31, 2009.
We generated net revenue of $13,903,438 during the six months ended December 31, 2010 and
$4,313,643 during the six months ended December 31, 2009. The increase in revenue is due to
increased sales volume through the network marketing or multi-level marketing sales channel. Our
sales in Japan contributed $1,589,466 and $2,830,797 of this increase for the three and six months
ended December 31, 2010, respectively. During the three and six month periods ended December 31,
2010, substantially all of our sales and marketing effort was directed toward building this
channel.
Gross Margin Our gross profit percentage for the three month periods ended December
31, 2010 and 2009 was 84% and 83%, respectively. Our gross profit percentage for the six months
ended December 31, 2010 and 2009 was 84% and 83%, respectively. The slightly higher gross margins
we have experienced are primarily due to efficiencies and cost reductions obtained through our
contract manufacturer. We expect the gross margin percentages for this sales channel to remain in
this range for the foreseeable future.
Operating Expenses Total operating expenses for the three months ended December 31,
2010 were $5,659,573 as compared to operating expenses of $4,723,478 for the three months ended
December 31, 2009. Total operating expenses during the six month period ended December 31, 2010
were $10,738,018 as compared to operating expenses of $9,276,990 during the six month period ended
December 31, 2009. Operating expenses consist of sales and marketing expenses, general and
administrative expenses, research and development, and depreciation and amortization expenses.
18
Sales and Marketing Expenses Sales and marketing expense increased from $1,962,590 for
the three months ended December 31, 2009 to $4,020,603 for the three months ended December 31,
2010. Sales and marketing expenses increased from approximately $3,975,195 for the six months ended
December 31, 2009 to $7,431,446 for the six months ended December 31, 2010. This increase was due
primarily to commissions paid to distributors due to the higher sales volume. The increase also
reflects expenses associated with sales events, such as our Elite
Academy, which took place in the
quarter ended December 31, 2010. We expect continued increases in sales and marketing expenses as
our sales increase.
General and Administrative Expenses Our general and administrative expense decreased
from $2,548,891 for the three months ended December 31, 2009 to $1,496,069 for the three months
ended December 31, 2010. General and administrative expense decreased from $4,929,608 for the six
months ended December 31, 2009 to $3,003,162 for the six months ended December 31, 2010. The
decreases are primarily due to decreased legal and personnel related costs and are partially offset
by increased bonus accruals and benefits costs. We expect general and administrative expenses to
remain relatively stable, however there will be some periodic increases associated with additional
personnel required to support our growth.
Research and Development Our research and development expenses decreased from $118,522
for the three months ended December 31, 2009 to $89,717 for the three months ended December 31,
2010. Research and development expenses decreased from $225,414 for the six months ended December
31, 2009 to $199,510 for the six months ended December 31, 2010. These decreases are a result of a
decrease in spending on contract research in the first half of our fiscal 2011. While research and development expenses were only $89,717 for the three months ended December
31, 2010 continued investment in research and development is a company priority and
we have ensured that sufficient cash is available for the remainder of this fiscal year to fund
research and development efforts amounting to approximately 2% of our total net revenue. The
recognition and timing of these expenses will be dependent upon entry into specific research and
development projects, which are still in the planning stages.
Depreciation and Amortization Expense Depreciation and amortization expense decreased
from $93,475 during the three months ended December 31, 2009 to $53,184 during the three months
ended December 31, 2010. Depreciation and amortization expense decreased from $146,773 for the six
months ended December 31, 2009 to $103,900 for the six months ended December 31, 2010. These
decreases were due primarily to assets being fully depreciated and are partially offset by
depreciation associated with capital acquisitions made in the quarter ended December 31, 2010.
Net Other Income We recognized net other income of $4,933,642 during the three months
ended December 31, 2010 as compared to net other income of $1,998,993 during the three months ended
December 31, 2009. During the six months ended December 31, 2010 we recognized net other income of
$5,304,066 as compared to net other income of $7,873,029 for the six months ended December 31,
2009. These fluctuations between periods are primarily the result of the change in fair value of
the derivative liabilities during the three and six months ended December 31, 2010 of $5,477,924
and $7,312,971, respectively. This income was partially offset by interest expense related to
convertible debentures and income tax expense.
Income Tax Expense We recognized income tax expense of $95,000 for the three and six
months ended December 31, 2010 as compared to none for the three and six months ended December 31,
2009. The income tax expense reflects our estimated liability for state income taxes for the six
months ended December 31, 2010.
Net Income/Loss We recorded net income of $5,447,624 for the three month period ended
December 31, 2010 compared to a net loss of $680,663 for the three month period ended December 31
2009. We recorded net income of $6,162,817 for the six month period ended December 31, 2010
compared to net income of $2,184,884 for the six month period ended December 31, 2009.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance our continued expansion
into the network marketing sales channel. This includes the costs associated with additional
support personnel, compensating our distributors, the manufacture and sale of our products, and
general and administrative expenses. In order to remain cash flow positive from operations, we must
maintain or continue to increase sales and maintain or limit expense increases, which we may be
unable to do.
Our primary sources of liquidity are cash generated from the sales of our product and funds
raised from our 2007, 2009 and 2010 private placements financing transactions. As of December
31, 2010, our available liquidity was $2,736,172, including available cash, cash equivalents and
marketable securities. This represented an increase of $1,098,496 from the $1,637,676 in cash,
cash equivalents and marketable securities as of June 30, 2010. During the six months ended
December 31, 2010, our net cash provided by operating activities was $1,112,303 as compared to net
cash used by operating activities of $3,257,760 during the six months ended December 31, 2009. Our
cash provided by operating activities during the six month period ended December 31, 2010 increased
primarily as a result of increased revenues.
19
During the six months ended December 31, 2010, our net cash used by investing activities was
$6,341, due to the redemption of marketable securities less the purchase of fixed and intangible
assets. During the six months ended December 31, 2009, our net cash provided by investing
activities was $52,166 primarily due to the redemption of marketable securities less the purchase
of intangible assets.
Cash provided by financing activities during the six months ended December 31, 2010 was none
compared to cash provided by financing activities of $2,882,255 during the six months ended
December 31, 2009. Cash provided by financing activities during the six month period ended
December 31, 2010 was related solely to net proceeds from the revolving line of credit. Cash
provided from financing activities during the six months ended December 31, 2009 was due to
proceeds from an equity offering of common stock and warrants and the issuance of convertible
debentures and warrants.
We maintain an investment portfolio of marketable securities that is managed by a professional
financial institution. The portfolio includes auction rate private securities, or ARPS, of AA and
AAA rated closed-end funds. These marketable securities which historically have been extremely
liquid have been adversely affected by the broader national liquidity crisis.
We have a line of credit that is secured by the marketable securities that we hold, which
allows us to borrow against 80% of the par value of these marketable securities. Based upon this
line of credit, we have classified 80% or $300,000 of our marketable securities as short term. The
remaining 20% or $75,000 of our marketable securities that may not be available in the next twelve
months is classified as long-term. However, future economic events could change the portion of
these classified as long term.
At December 31, 2010, we had negative working capital (current assets minus current
liabilities) of $(818,406), compared to negative working capital of $(2,103,899) at June 30, 2010.
The negative working capital at December 31, 2010 is due to the classification of certain
derivative liabilities related to the 2009 convertible debentures as short-term in the quarter
ended December 31, 2010.
Our ability to finance future operations will depend on our existing liquidity and on our
ability to generate continued revenues and profits from operations. We believe that existing cash
on hand and future cash flow will be sufficient to allow us to continue operations for at least the
next 12 months. A shortfall from projected sales levels would likely result in expense reductions,
which could have a material adverse effect on our ability to continue operations at current levels.
If we are unable to generate cash from operations at projected or otherwise sufficient levels, we
may be required to seek additional funds through debt, equity or equity-based financing (such as
convertible debt); however financing may not be available on favorable terms or at all. If we raise
additional funds by selling additional shares of our capital stock, or securities convertible into
shares of our capital stock, the ownership interest of our existing shareholders will be diluted.
The amount of dilution could be increased by the issuance of warrants or securities with other
dilutive characteristics, such as anti-dilution clauses or price resets.
Off-Balance Sheet Arrangements
As of December 31, 2010, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally
accepted in the United States of America. As such, we are required to make certain estimates,
judgments, and assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from these estimates. Our significant accounting policies
are described in Note 2 to our financial statements. Certain of these significant accounting
policies require us to make difficult, subjective, or complex judgments or estimates. We consider
an accounting estimate to be critical if (1) the accounting estimate requires us to make
assumptions about matters that were highly uncertain at the time the accounting estimate was made,
and (2) changes in the estimate that are reasonably likely to occur from period to period, or use
of different estimates that we reasonably could have used in the current period, would have a
material impact on our financial condition or results of operations.
There are other items within our financial statements that require estimation, but are not
deemed critical as defined above. Changes in estimates used in these and other items could have a
material impact on our financial statements. Management has discussed the development and selection
of these critical accounting estimates with our board of directors, and the audit committee has
reviewed the foregoing disclosure.
20
Allowances for Product Returns We record allowances for product returns at the time we
ship the product based on estimated return rates of 1% to 4%. We base these accruals on the
historical return rate since the inception of our selling activities, and the specific historical
return patterns of the product.
We offer a 30-day, money back unconditional guarantee to all direct customers. As of December
31, 2010, our direct and network marketing sales shipments of approximately $2,377,000 were
subject to the money back guarantee. We replace product returned due to damage during shipment
wholly at our cost, the total of which historically has been negligible. In addition, we allow
terminating distributors to return 30% of unopened unexpired product that they purchased during the
prior twelve months, subject to certain consumption limitations.
We monitor our return estimate on an ongoing basis and may revise the allowances to reflect
our experience. Our allowance for product returns was $625,730 on December 31, 2010, compared with
$343,900 on June 30, 2010. To date, product expiration dates have not played any role in product
returns, and we do not expect product expiration dates to affect product returns in the foreseeable
future because it is unlikely that we will ship product with an expiration date earlier than the
latest allowable product return date.
Inventory Valuation We state inventories at the lower of cost or market on a first-in
first-out basis. From time to time we maintain a reserve for inventory obsolescence and we base
this reserve on assumptions about current and future product demand, inventory whose shelf life has
expired and market conditions. From time to time, we may be required to make additional reserves in
the event there is a change in any of these variables. We have recorded $103,359 of reserve for
obsolete inventory as of December 31, 2010 primarily for obsolete marketing materials.
Revenue Recognition We ship the majority of our product directly to the consumer
through the direct to consumer and network marketing sales channels via United Parcel Service,
(UPS), and receive substantially all payment for these shipments in the form of credit card
charges. We recognize revenue from direct product sales to customers upon passage of title and risk
of loss to customers when product is shipped from the fulfillment facility. Sales revenue and
estimated returns are recorded when product is shipped.
Derivative Instruments In connection with the sale of debt or equity instruments, we
may sell options or warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as conversion options,
which in certain circumstances may be required to be bifurcated from the associated host instrument
and accounted for separately as a derivative instrument liability.
The identification of, and accounting for, derivative instruments is complex. For options,
warrants and any bifurcated conversion options that are accounted for as derivative instrument
liabilities, we determine the fair value of these instruments using the Black-Scholes option
pricing model. That model requires assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend yield, and the
expected volatility of our common stock price over the life of the instruments. Because of the
limited trading history for our common stock, we have estimated the future volatility of our common
stock price based on not only the history of our stock price but also the experience of other
entities considered comparable to us. The identification of, and accounting for, derivative
instruments and the assumptions used to value them can significantly affect our financial
statements.
Intangible Assets Patent Costs We review the carrying value of our patent costs and
compare to fair value at least annually to determine whether the patents have continuing value. In
determining fair value, we consider undiscounted future cash flows and market capitalization.
Stock-Based Compensation We use the fair value approach to account for stock-based
compensation in accordance with the modified version of prospective application.
Research and Development Costs We have expensed all of our payments related to
research and development activities.
Recently Issued Accounting Standards
We have reviewed recently issued, but not yet effective, accounting pronouncements and do not
believe any such pronouncements will have a material impact on our financial statements.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Under the rules and regulations of the SEC, as a smaller reporting company we are not required
to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, we conducted an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures also include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to
the companys management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of December 31, 2010 at
the reasonable assurance level due to the material weaknesses in our internal control over
financial reporting discussed immediately below.
Identified Material Weaknesses
A material weakness is a control deficiency, or combination of deficiencies, that results in
more than a remote likelihood that a material misstatement of our financial statements would not be
prevented or detected on a timely basis by our employees in the normal course of performing their
assigned functions. Management identified material weaknesses during our assessment of our internal
control over financial reporting as of December 31, 2010. In particular, we concluded that we did
not maintain:
1. |
|
Adequate oversight of certain accounting functions and did not maintain adequate
documentation of management review and approval of accounting transactions and financial
reporting processes; and |
2. |
|
Formal policies governing certain accounting transactions and financial reporting processes. |
In conclusion, our Chief Executive Officer and Chief Financial Officer determined that we did
not maintain effective internal control over financial reporting as of December 31, 2010.
Managements Remediation Initiatives
We are in the process of evaluating our material
weaknesses. In an effort to remediate the identified material
weaknesses and other deficiencies and to enhance our internal control over financial reporting, we
have initiated, or plan to initiate, the following series of measures:
|
1) |
|
Implement appropriate management oversight and approval activities; and |
|
2) |
|
Establish comprehensive formal general accounting policies and procedures and require
employees to sign off such policies and procedures as documentation of their understanding
of and compliance with company policies. |
We plan to test our updated controls and remediate our material weaknesses by June 30, 2011.
In our Annual Report on Form 10-K for the year ended June 30, 2010 (filed with the SEC on
September 15, 2010) in addition to the material weaknesses discussed above, we identified two other
material weaknesses in our internal controls related to the lack of: (i) sufficient personnel with
an appropriate level of accounting knowledge, experience and training in the selection and
application of technical accounting principles in accordance with GAAP to support our financial
accounting and reporting functions; and (ii) a whistleblower hotline. During the quarter ended
September 30, 2010 we hired additional staff with experience managing and working in the corporate
accounting department of a publicly traded company and established a whistleblower hotline.
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Conclusion
The above identified material weaknesses resulted in material audit adjustments to our 2010
financial statements. If the identified material weaknesses are not remediated, one or more of the
identified material weaknesses noted above could result in a material misstatement in our reported
financial statements in a future interim or annual period.
In light of the identified material weaknesses, management performed (1) significant
additional substantive review of those areas described above, and (2) additional analyses,
including but not limited to a detailed balance sheet and statement of operations analytical review
that compared changes from the prior periods financial statements and analyzed all significant
differences. These procedures were completed so management could gain assurance that the financial
statements included in this report fairly present in all material respects our financial position,
results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting or in
other factors that have materially affected, or are reasonably likely
to materially affect our internal control over financial reporting, during the period covered by this Quarterly Report.
We continue to work on remediating our identified material weaknesses.
23
PART II Other Information
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the risk factors discussed in Part I. Item 1ARisk Factors in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2010. The risks and uncertainties described in such risk factors and
elsewhere in this report have the potential to materially affect our business, financial condition,
results of operations, cash flows, projected results and future prospects. As of the date of this
report, we do not believe that there have been any material changes to the risk factors previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, we issued 800,000 unregistered shares of our common
stock upon the conversion of convertible debentures originally acquired from us in September and
October 2007. The shares issued were exempt from registration under the Securities Act of 1933
pursuant to Section 3(a)(9) thereof. The shares were exchanged for outstanding debentures
exclusively with the holder thereof and no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
None.
Item 5. Other Information
None.
Item 6. Exhibits
See the exhibit index immediately following the signature page of this report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LIFEVANTAGE CORPORATION |
|
|
Date: February 14, 2011 |
/s/ David W. Brown
|
|
|
David W. Brown |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: February 14, 2011 |
/s/ Carrie E. McQueen
|
|
|
Carrie E. McQueen |
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
25
Exhibit Index
|
|
|
Exhibit |
|
Description |
10.1#
|
|
LifeVantage FY2011 Corporate Bonus Plan (1) |
|
|
|
31.1
|
|
Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2
|
|
Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
32.1**
|
|
Certification of principal executive officer and principal financial officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2**
|
|
Certification of principal executive officer and principal financial officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
# |
|
Management contract or compensatory plan. |
|
(1) |
|
Filed as an exhibit to the registrants quarterly report on Form 10-Q for the period ended
September 30, 2010 filed on November 8, 2010, and incorporated herein by reference |
|
** |
|
This certification is being furnished solely to accompany this report pursuant to 18 U.S.C.
1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934
and is not to be incorporated by reference into any filing of the registrant, whether made
before or after the date hereof, regardless of any general incorporation language in such
filing |
26