NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
These unaudited Condensed Consolidated Financial Statements and Notes should be read in conjunction with the audited financial statements and notes of LifeVantage Corporation (the “Company”) as of and for the year ended
June 30, 2016
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on December 12, 2016.
Note 1 — Organization and Basis of Presentation
LifeVantage Corporation is a company dedicated to helping people achieve their health, wellness and financial independence goals. We provide quality, scientifically-validated products and a financially rewarding direct sales business opportunity to customers and independent distributors who seek a healthy lifestyle and financial freedom. We sell our products to preferred customers, retail customers and independent distributors located in the United States, Japan, Hong Kong, Australia, Canada, Philippines, Mexico, Thailand, the United Kingdom and the Netherlands.
We engage in the identification, research, development and distribution of advanced nutraceutical dietary supplements and skin care products, including Protandim
®
, our scientifically-validated dietary supplement, LifeVantage TrueScience
®
, our line of anti-aging skin care products, Canine Health
®
, our companion pet supplement formulated to combat oxidative stress in dogs, Axio
®
, our energy drink mixes, and PhysIQ
™
, our smart weight management system.
The condensed consolidated financial statements included herein have been prepared by the Company’s management, without audit, pursuant to the rules and regulations of the SEC. In the opinion of the Company’s management, these interim financial statements include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair presentation of its financial position as of
December 31, 2016
, and the results of operations for the
three and six months ended
December 31, 2016
and
2015
, respectively, and the cash flows for the
six months ended
December 31, 2016
and
2015
, respectively. Interim results are not necessarily indicative of results for a full year or for any future period. Certain amounts in the prior year financial statements have been reclassified for comparative purposes in order to conform with current year 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 the Company’s audited financial statements and notes for the fiscal year ended
June 30, 2016
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, 2016
, and included in the Annual Report on Form 10-K on file with the SEC.
Note 2 — Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
We prepare our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, we are required to use estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. On an ongoing basis, we review our estimates, including those related to inventory valuation and obsolescence, sales returns, income taxes and tax valuation reserves, share-based compensation, and loss contingencies.
Translation of Foreign Currency Statements
A portion of the Company’s business operations occurs outside the United States. The local currency of each of the Company’s subsidiaries is generally its functional currency. All assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted-average exchange rates and stockholders’ equity is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded as a separate component of stockholders’ equity in the condensed consolidated balance sheets and as a component of comprehensive income. Transaction gains and losses and currency translation gains and losses on intercompany balances denominated in a foreign currency are included in other income (expense), net in the condensed consolidated statements of
operations and comprehensive income. For the
three months ended December 31, 2016
and
2015
, net foreign currency losses of
$0.3 million
and
$4,000
, respectively, are recorded in other income (expense), net. For the
six months ended December 31, 2016
and
2015
, net foreign currency losses of
$0.4 million
and
$0.2 million
, respectively, are recorded in other income (expense), net.
Derivative Instruments and Hedging Activities
The Company's subsidiaries enter into transactions with each other which may not be denominated in the respective subsidiaries' functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of derivatives. The Company does not use such derivative financial instruments for trading or speculative purposes.
To hedge risks associated with the foreign-currency-denominated intercompany transactions, the Company entered into forward foreign exchange contracts which were settled in
December 2016
and were not designated for hedge accounting. For the
three months ended December 31, 2016
and
2015
, realized gains of
$0.2 million
and
$2,000
, respectively, related to forward contracts, are recorded in other income (expense), net. For the
six months ended December 31, 2016
and
2015
, a realized gain of
$0.1 million
and a loss of
$7,000
, respectively, related to forward contracts, are recorded in other income (expense), net. The Company did not hold any derivative instruments at
December 31, 2016
.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.
Concentration of Credit Risk
Accounting guidance for financial instruments requires disclosure of 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, 2016
, the Company had
$8.4 million
in cash accounts that were held primarily at one financial institution and
$3.3 million
in accounts at other financial institutions. As of
December 31, 2016
and
June 30, 2016
, and during the periods then ended, the Company’s cash balances exceeded federally insured limits.
Accounts Receivable
The Company’s accounts receivable as of
December 31, 2016
and
June 30, 2016
consist primarily of credit card receivables. Based on the Company’s verification process for customer credit cards and historical information available, management has determined that an allowance for doubtful accounts on credit card sales as of
December 31, 2016
is not necessary.
No
bad debt expense has been recorded for the periods ended
December 31, 2016
and
December 31, 2015
.
Inventory
As of
December 31, 2016
and
June 30, 2016
, inventory consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
June 30,
2016
|
Finished goods
|
$
|
10,663
|
|
|
$
|
14,852
|
|
Raw materials
|
10,714
|
|
|
10,264
|
|
Total inventory
|
$
|
21,377
|
|
|
$
|
25,116
|
|
Inventories are carried and depicted above at the lower of cost or net realizable value, using the first-in, first-out method, which includes a reduction in inventory values of
$0.6 million
and
$0.4 million
at
December 31,
2016
and
June 30, 2016
, respectively, related to obsolete and slow-moving inventory.
Revenue Recognition
The Company ships the majority of its product directly to the consumer and receives substantially all payment for these sales in the form of credit card receipts. Revenue from direct product sales to customers is recognized upon shipment when passage of title and risk of loss occurs. Estimated returns are recorded when product is shipped. Subject to some exceptions based on local regulations, the Company’s return policy is to provide a full refund for product returned within
30
days if the returned product is unopened or defective. After
30
days, the Company generally does not issue refunds to direct sales customers for returned product. The Company allows terminating distributors to return up to
30%
of unopened, unexpired product that they have purchased within the prior twelve months for a full refund, less a
10%
restocking fee. The Company establishes the returns reserve based on historical experience. The returns reserve is evaluated on a quarterly basis. As of
December 31, 2016
and
June 30, 2016
, the Company’s reserve balance for returns and allowances was approximately
$0.4 million
and
$0.3 million
, 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 customers are included in sales.
Research and Development Costs
The Company expenses all costs related to research and development activities as incurred. Research and development expenses for the
six months ended
December 31, 2016
and
2015
were approximately
$0.6 million
and
$0.5 million
, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation by measuring the cost of services to be rendered based on the grant date fair value of the equity award. The Company recognizes stock-based compensation, net of any estimated forfeitures, over the period an employee is required to provide service in exchange for the award, generally referred to as the requisite service period. For awards with market-based performance conditions, the cost of the awards is recognized as the requisite service is rendered by employees, regardless of when, if ever, the market-based performance conditions are satisfied.
The Black-Scholes option pricing model is used to estimate the fair value of stock options. The determination of the fair value of stock options is affected by the Company's stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company uses historical volatility as the expected volatility assumption required in the Black-Scholes model. The Company utilizes a simplified method for estimating the expected life of the options. The Company uses this method because it believes that it provides a better estimate than the Company’s historical data as post vesting exercises have been limited. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the stock options.
The fair value of restricted stock grants is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield. The fair value of performance stock units that include market-based performance conditions is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield, with further adjustments made to reflect the market conditions that must be satisfied in order for the units to vest by using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model include the risk-free rate, expected volatility, expected dividends and the correlation coefficient. The fair value of cash-settled performance-based awards, accounted for as liabilities, is remeasured at the end of each reporting period and is based on the closing market price of the Company’s stock on the last day of the reporting period. The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance conditions will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs accordingly.
Reverse Stock Split
In October 2015, following approval of the Company's shareholders, the Company's board of directors approved the filing of an amendment to the Company's amended and restated articles of incorporation to effectuate a reverse split of the issued and outstanding shares of the Company's common stock on a one-for-seven basis. The reverse stock split was effective on
October 19, 2015
. The par value and authorized number of shares of common stock were not adjusted as a result of the reverse split. All fractional shares resulting from the reverse stock split were rounded up. All issued and outstanding common stock and per share amounts contained within the Company's consolidated financial statements and footnotes have been retroactively adjusted to reflect this reverse stock split for all periods presented.
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.
For the
six months ended
December 31, 2016
and
2015
the Company recognized income tax expense of
$0.6 million
and
$1.5 million
, respectively, which is reflective of the Company’s current estimated federal, state and foreign effective tax rate. Realization of deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of
which are uncertain. The Company continues to evaluate the realizability of the deferred tax asset based upon achieved and estimated future results. The difference between the
six months ended
December 31, 2016
effective rate of
30.0%
and the Federal statutory rate of
35.0%
is due primarily to the effect of certain permanent differences, discrete items, return to provision adjustments and benefits from our permanent reinvestment assertion.
Income Per Share
Basic income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period, less unvested restricted stock awards. Diluted income per common share is computed by dividing net income by the weighted-average common shares and potentially dilutive common share equivalents using the treasury stock method.
For the
three and six months ended
December 31, 2016
the effects of approximately
0.1 million
and
43,000
common shares, respectively, issuable upon exercise of options and non-vested shares of restricted stock granted pursuant to the Company’s 2007 and 2010 Long-Term Incentive Plans are not included in computations because their effect was anti-dilutive. For the
three and six months ended
December 31, 2015
the effects of approximately
0.2 million
and
0.2 million
common shares, respectively, issuable upon exercise of options granted pursuant to the Company’s 2007 and 2010 Long-Term Incentive Plans were not included in computations because their effect was anti-dilutive.
The following is a reconciliation of net income per share and the weighted-average common shares outstanding for purposes of computing basic and diluted net income per share (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
283
|
|
|
$
|
1,600
|
|
|
$
|
1,463
|
|
|
$
|
2,666
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
13,840
|
|
|
13,718
|
|
|
13,830
|
|
|
13,714
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock awards and options
|
250
|
|
|
227
|
|
|
302
|
|
|
171
|
|
Warrants
|
42
|
|
|
71
|
|
|
44
|
|
|
67
|
|
Diluted weighted-average common shares outstanding
|
14,132
|
|
|
14,016
|
|
|
14,176
|
|
|
13,952
|
|
Net income per share, basic
|
$
|
0.02
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.19
|
|
Net income per share, diluted
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.19
|
|
Segment Information
The Company operates in a single operating segment by selling products to an international network of independent distributors that operates in an integrated manner from market to market. Commissions and incentives expenses are the Company’s largest expense comprised of the commissions paid to its independent distributors. The Company manages its business primarily by managing its international network of independent distributors. The Company does not use profitability reports on a regional or divisional basis for making business decisions. However, the Company does report revenue in
two
geographic regions: the Americas region and the Asia/Pacific & Europe region. Revenues by geographic region are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Americas
|
$
|
37,613
|
|
|
$
|
40,055
|
|
|
$
|
77,748
|
|
|
$
|
74,781
|
|
Asia/Pacific & Europe
|
11,334
|
|
|
11,940
|
|
|
26,093
|
|
|
22,566
|
|
Total revenues
|
$
|
48,947
|
|
|
$
|
51,995
|
|
|
$
|
103,841
|
|
|
$
|
97,347
|
|
Additional information as to the Company’s revenue from operations in the most significant geographical areas is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
United States
|
$
|
35,535
|
|
|
$
|
38,761
|
|
|
$
|
74,153
|
|
|
$
|
72,257
|
|
Japan
|
$
|
9,498
|
|
|
$
|
9,220
|
|
|
$
|
20,105
|
|
|
$
|
17,813
|
|
As of
December 31, 2016
, long-lived assets were
$6.6 million
in the United States and
$1.0 million
in Japan. As of
June 30, 2016
, long-lived assets were
$4.2 million
in the United States and
$1.3 million
in Japan.
Effect of New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 606,
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration it expects to receive in exchange for those goods or services. ASC 606 will be effective for the Company in the first quarter of fiscal 2019. The Company has performed a detailed analysis and does not anticipate that ASC 606 will have a significant impact on revenue recognition or its consolidated financial statements due to the types of revenue transactions that the Company enters into.
Subsequent to the release of the updated revenue recognition standard discussed above, FASB issued Accounting Standards Update (ASU) 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815),
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
and
ASU 2016-20
, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
These updates are intended to improve the operability and understandability of the implementation guidance for the updated revenue standard as it relates to the subjects noted. The amendments in these updates have the same effective date as ASC 606 as noted above, and the Company does not anticipate that these updates will have a significant impact on its revenue recognition policy or its consolidated financial statements.
In November 2015, FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.
Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that all deferred tax assets or liabilities be classified as noncurrent in the classified statement of financial position. The Company early adopted this update prospectively during the first quarter of fiscal
2017
, which resulted in the reclassification of the deferred taxes from current to noncurrent on the balance sheet. Prior period balances were not retrospectively adjusted.
In February 2016, FASB issued ASU No. 2016-02,
Leases (Topic 841)
. For lessees, the amendments in this update require that for all leases not considered to be short term, a company recognize both a lease liability and right-of-use asset on its balance sheet, representing the obligation to make payments and the right to use or control the use of a specified asset for the lease term. The amendments in this update are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is currently evaluating the impact that this amendment will have on its consolidated financial statements.
In March 2016, FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The amendments in this update involve several aspects of the accounting for share-based compensation transactions, including the income tax consequences, forfeitures, statutory withholding requirements and cash flow classification for applicable transactions, in an effort to reduce costs and complexity associated with these transactions while maintaining the usefulness of financial information. Prior to this update, all excess tax benefits were recognized in additional paid in capital ("APIC") and accumulated in an APIC pool and any tax deficiencies realized were offset against the APIC pool to the extent available, with any excess amounts recognized in the income statement. Under this new amendment, any excess tax benefits or deficiencies resulting from the exercise, vesting or settlement of share-based payment transactions will be recognized in the income statement as tax benefits or expenses prospectively from the date of adoption. Estimating forfeitures as part of the recognition of compensation costs is no longer required, rather, an entity can make the election to account for forfeitures when they occur. The Company early adopted this update during the first quarter of
fiscal
2017
and began recording the excess tax benefits to the income statement. The Company elected to continue estimating forfeitures as part of its share-based compensation accounting policy.
Note 3 — Long-Term Debt
On
October 18, 2013
, the Company entered into a Financing Agreement providing for a term loan facility in an aggregate principal amount of
$47 million
(the “October 2013 Term Loan”) and a delayed draw term loan facility in an aggregate principal amount not to exceed
$20 million
(the “October 2013 Delayed Draw Term Loan”). The October 2013 Delayed Draw Term Loan was available for borrowing in specified minimum amounts from time to time beginning after the effective date of the Financing Agreement until
October 18, 2014
. The Company did not borrow any amounts under the October 2013 Delayed Draw Term Loan.
On
May 1, 2015
, the Company entered into an Amendment No. 1 to Financing Agreement ("Amendment No. 1"). Amendment No. 1 revised the
March 31, 2015
and
June 30, 2015
consolidated EBITDA covenants from
$20.6 million
and
$21.3 million
, respectively, to
$17.0 million
for each quarter end. Amendment No. 1 also revised the minimum unrestricted cash and cash equivalents that the Company was required to hold from
$10.0 million
to
$8.0 million
for the reporting periods ended
March 31, 2015
and
June 30, 2015
. In addition, Amendment No. 1 required that the Company make certain accelerated principal payments on the October 2013 Term Loan totaling
$4.5 million
during the fourth quarter of fiscal year
2016
.
On
August 27, 2015
, the Company entered into an Amendment No. 2 to Financing Agreement ("Amendment No. 2" and collectively, with the October 2013 Term Loan, as previously amended by Amendment No. 1, the "October 2013 Credit Facility"). Amendment No. 2 revised the covenants related to minimum consolidated EBITDA (as defined in the amended Financing Agreement) for the four consecutive fiscal quarters ending
September 30, 2015
,
December 31, 2015
,
March 31, 2016
and
June 30, 2016
from
$22.2 million
,
$23.1 million
,
$24.4 million
and
$25.6 million
, respectively, to
$14.5 million
,
$15.0 million
,
$17.0 million
and
$17.5 million
, respectively. In addition, Amendment No. 2 required that the Company make additional monthly accelerated principal payments on the October 2013 Term Loan in the amount of
$0.5 million
commencing on
October 15, 2015
and continuing until the Term Loan was paid in full. Amendment No. 2 also required that the Company make additional accelerated payments at the end of each fiscal quarter in the amount of all unrestricted cash on hand as of the close of business on the last day of the quarter in excess of
$12.5 million
.
The principal amount of the October 2013 Term Loan was payable in consecutive quarterly installments beginning with the calendar quarter ended
March 31, 2014
and matured on the earlier of
October 18, 2018
or such date as the outstanding loans became payable in accordance with the terms of the Financing Agreement (the “Final Maturity Date”). The October 2013 Term loan bore interest at a rate equal to
7.5%
per annum plus the greater of (i)
1.25%
or (ii) LIBOR, or at the Company’s option, a reference rate (as defined in the Financing Agreement) plus
6.5%
per annum, with such interest payable monthly. For the
six months ended
December 31, 2016
, the average interest rate was
8.75%
. On
March 30, 2016
, the Company repaid the full amount outstanding under the October 2013 Term Loan and terminated the October 2013 Credit Facility.
On
March 30, 2016
, the Company entered into a Loan Agreement (the “March 2016 Loan Agreement”) to refinance its outstanding debt under the October 2013 Term Loan. In connection with the March 2016 Loan Agreement and on the same date, the Company entered into a Security Agreement (the “March 2016 Security Agreement”). The March 2016 Loan Agreement provides for a term loan in an aggregate principal amount of
$10.0 million
(the “March 2016 Term Loan") and a revolving loan facility in an aggregate principal amount not to exceed
$2.0 million
(the “March 2016 Revolving Loan,” and collectively with the March 2016 Term Loan, the March 2016 Loan Agreement and the March 2016 Security Agreement, the “March 2016 Credit Facility”).
The principal amount of the March 2016 Term Loan is payable in consecutive
quarterly
installments in the amount of
$0.5 million
plus accrued interest beginning with the fiscal quarter ended
June 30, 2016
and maturing on
March 30, 2019
(the “Maturity Date”). The March 2016 Term Loan bears interest at a fixed rate of
4.93%
. If the Company borrows under the March 2016 Revolving Loan, interest will be payable quarterly in arrears on the last day of each fiscal quarter at a variable rate equal to the 30 day LIBOR Rate plus
3.50%
.
The Company’s obligations under the March 2016 Credit Facility are secured by a security interest in substantially all of the Company’s assets. Loans outstanding under the March 2016 Credit Facility may be prepaid in whole or in part at any time without premium or penalty. In addition, if, at any time, the aggregate principal amount outstanding under the March 2016 Revolving Loan exceeds
$2.0 million
, the Company must prepay an amount equal to such excess. Any principal amount of the March 2016 Term Loan which is prepaid or repaid may not be re-borrowed.
The March 2016 Credit Facility contains customary covenants, including affirmative and negative covenants that, among other things, restrict the Company’s ability to create certain types of liens, incur additional indebtedness, declare or pay dividends on or redeem capital stock, make other payments to holders of equity interests in the Company, make certain investments, purchase or otherwise acquire all or substantially all the assets or equity interests of other companies, sell assets or
enter into consolidations, mergers or transfers of all or any substantial part of the Company’s assets. The March 2016 Credit Facility also contains various financial covenants that require the Company to maintain a certain consolidated minimum tangible net worth, minimum working capital amounts, and certain debt to EBITDA and fixed charge coverage ratios. Additionally, the March 2016 Credit Facility contains cross-default provisions, whereby a default under the terms of certain indebtedness or an uncured default of a payment or other material obligation of the Company under a material contract of the Company will cause a default on the remaining indebtedness under the March 2016 Credit Facility. As of
December 31, 2016
, the Company was in compliance with all applicable covenants under the March 2016 Credit Facility; provided, however, that on October 24, 2016, the Company was granted a waiver and extension to covenants requiring the Company to provide the lender with audited financial statements for the Company's 2016 fiscal year on or before
October 28, 2016
. Under the limited waiver and extension, the lender agreed to waive compliance with this requirement if the Company delivered such audited financial statements prior to December 31, 2016. In connection with the filing of the Company's Form 10-K on December 12, 2016, the Company delivered all required information to the lender to satisfy the requirement.
During the
six months ended
December 31, 2016
, the Company recorded interest expense of
$16,000
related to the normal amortization of transaction costs associated with the March 2016 Credit Facility. At
December 31, 2016
, the Company had unamortized transaction costs totaling
$0.1 million
included in the consolidated balance sheet related to the March 2016 Credit Facility. This balance will be amortized to interest expense using the effective interest method over the term of the loan.
The Company’s book value for the March 2016 Credit Facility approximates the fair value. Aggregate future principal payments required in accordance with the terms of the March 2016 Credit Facility are as follows (in thousands):
|
|
|
|
|
Fiscal Year Ending June 30,
|
Amount
|
2017 (remaining six months ending June 30, 2017)
|
$
|
1,000
|
|
2018
|
2,000
|
|
2019
|
5,500
|
|
|
$
|
8,500
|
|
Note 4 — Stockholders’ Equity
During the
three and six months ended
December 31, 2016
, the Company issued
10,000
and
19,000
shares, respectively, of restricted stock and
1,000
and
29,000
shares, respectively, of common stock upon the exercise of warrants and options. During the
three and six months ended
December 31, 2016
,
16,000
and
22,000
shares, respectively, of restricted stock were canceled or surrendered as payment of tax withholding upon vesting.
The Company’s Articles of Incorporation authorize the issuance of preferred shares. However, as of
December 31, 2016
, none have been issued and no rights or preferences have been assigned to the preferred shares by the Company’s Board of Directors.
Note 5 — Stock-based Compensation
Long-Term Incentive Plans
The Company 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
1.4 million
shares of the Company's 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, Scientific Advisory Board members and independent distributors at prices between
$1.47
and
$10.50
per share, with initial vesting periods of
one
to
three
years. 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. The contractual term of stock options granted is generally
ten
years. As of
December 31, 2016
, there were awards outstanding, net of awards expired, for the purchase in aggregate of
0.2 million
shares of the Company's common stock.
The Company adopted and the shareholders approved the 2010 Long-Term Incentive Plan (the “2010 Plan”), effective September 27, 2010, as amended on August 21, 2014, to provide incentives to eligible employees, directors and consultants. A maximum of
1.5 million
shares of the Company's common stock can be issued under the 2010 Plan in connection with the grant of awards. Awards to purchase common stock have been granted pursuant to the 2010 Plan and are outstanding to various employees, officers and directors. Outstanding stock options awarded under the 2010 Plan have exercise prices between
$4.41
and
$24.71
per share, and vest over
one
to
four
year vesting periods. Awards expire in accordance with the terms of each award and the shares subject to the award are added back to the 2010 Plan upon expiration of the award. The contractual term of stock
options granted is generally
ten
years. As of
December 31, 2016
, there were awards outstanding, net of awards expired, for an aggregate of
0.1 million
shares of the Company’s common stock.
The Company adopted a Performance Incentive Plan effective July 1, 2014 (the "Fiscal 2015 Performance Plan"). The Fiscal 2015 Performance Plan is intended to provide selected employees an opportunity to earn performance-based cash bonuses whose value is based upon the Company’s stock value and to encourage such employees to provide services to the Company and to attract new individuals with outstanding qualifications. The Fiscal 2015 Performance Plan seeks to achieve this purpose by providing for awards in the form of performance share units (the “Units”). No shares will be issued under the Fiscal 2015 Performance Plan. Awards may be settled only with cash and will be paid subsequent to award vesting. The fair value of share-based compensation awards, that include performance shares, are accounted for as liabilities. Vesting for the Units is subject to achievement of both service-based and performance-based vesting requirements. Performance-based vesting occurs in
three
installments if the Company meets certain performance criteria generally set for each year of a
three
-year performance period. The service-based vesting criteria occurs in a single installment at the end of the third fiscal year after the awards are granted if the participant has continuously remained in service from the date of award through the end of the third fiscal year. The fair value of these awards is based on the trading price of the Company's common stock and is remeasured at each reporting period date until settlement. The Company adopted separate Performance Incentive Plans effective July 1, 2015 (the "Fiscal 2016 Performance Plan") and July 1, 2016 (the "Fiscal 2017 Performance Plan"). The Fiscal 2016 and 2017 Performance Plans include the same performance-based and service-based vesting requirements and payment terms.
Stock-Based Compensation
In accordance with accounting guidance for stock-based compensation, payments in equity instruments for goods or services are accounted for under the fair value method. For the
three and six months ended
December 31, 2016
, stock-based compensation of
$0.3 million
and
$1.0 million
, respectively, was reflected as an increase to additional paid-in capital and an increase of
$0.1 million
and
$0.2 million
, respectively, was included in other accrued expenses, all of which was employee related. For the
three and six months ended
December 31, 2015
, stock-based compensation of
$0.3 million
and
$0.5 million
, respectively, was reflected as an increase to additional paid-in capital, all of which was employee related.
On
January 4, 2016
, the Company awarded Performance Stock Units under the 2010 Long-Term Incentive Plan to its executive officers (the "Recipients") and, in
March 2016
, the Company and each Recipient entered into an amended and restated stock unit agreement (the "Restated Stock Unit Agreement") amending the terms of the January 2016 awards. Under the Restated Stock Unit Agreements, vesting for the Performance Stock Units occurs at the end of a
three
year performance period (the "Performance Period") and is subject to achievement of both service-based and market-based performance vesting requirements. Subject generally to the Recipient's continued service with the Company (the service based requirement) and limitations otherwise set forth in the 2010 Long-Term Incentive Plan, each Performance Stock Unit represents a contingent right for the Recipient to receive, within thirty days after the end of the performance period, a distribution of shares of common stock of the Company equal to
0%
to
200%
of the target number of Performance Stock Units subject to the award. The actual number of shares distributed will be based on the Company's total stockholder return ("TSR") performance during the Performance Period, subject to acceleration upon a change in control of the Company. The vesting for
50%
of the Performance Stock Units is based upon the Company's absolute TSR for the performance period compared to a matrix of fixed numeric values and the vesting for the other
50%
of the Performance Stock Units is based upon the relative comparison of the Company's TSR to the Vanguard Russell 2000 exchange traded fund TSR. The fair value of the Performance Stock Units will be recognized on a straight-line basis over the requisite service period of the awards, regardless of when, if ever, the market-based performance conditions are satisfied.
Note 6 — Commitments and Contingencies
Contingencies
The Company accounts for contingent liabilities in accordance with Accounting Standards Codification ("ASC") Topic 450,
Contingencies
. This guidance requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. For loss contingencies considered remote, no accrual or disclosures are generally made. Management has assessed potential contingent liabilities as of
December 31, 2016
, and based on the assessment there are no probable loss contingencies requiring accrual or disclosures within these financial statements and footnotes.
Legal Accruals
In addition to commitments and obligations in the ordinary course of business, from time to time, the Company is subject to various claims, pending and potential legal actions, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. Management assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in our consolidated financial statements. An estimated loss contingency is accrued in our consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because evaluating legal claims and litigation results are inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, management may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed or asserted against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of a potential liability. Management regularly reviews contingencies to determine the adequacy of financial statement accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company's business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on our consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.
Former Distributor Lawsuit:
On November 20, 2013, the Company filed a complaint in the United States District Court, District of Utah, Central Division naming Jason Domingo and Ovation Marketing Group, Inc. as defendants. Ovation Marketing Group, Inc. is a former distributor of our company. In the complaint, the Company alleges that the defendants breached a contract and misappropriated the Company's trade secrets. On January 21, 2014, the defendants filed an answer and counterclaim in response to the complaint. The defendants' answer and counterclaims allege defamation and tortious interference with economic relations, which the defendants claim resulted in damages of not less than
$20 million
. On December 14, 2015, the Company filed a motion for summary judgment seeking judgment in its favor on the Company's breach of contract claim and dismissal of all defendants’ counterclaims. Also on December 14, 2015, defendants filed a motion for summary judgment seeking dismissal of the Company's claim for misappropriation of trade secrets and to dismiss the Company's judicial proceedings privilege defense against the defamation claim. The Court heard oral argument on the motions for summary judgment on May 17, 2016. The court granted summary judgment in favor of the Company on all claims except the defamation claim, which remains unresolved. The Company has not established a loss contingency accrual for this remaining counterclaim as to which the Company believes liability is not probable and estimable, and the Company plans to vigorously defend against this lawsuit. On January 20, 2017, the court denied the defendants renewed motion for summary judgment on its contract claim. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.
Class Action Lawsuit:
On September 15, 2016, a purported securities class action was filed in the United States District Court for the District of Utah, entitled
Zhang v. LifeVantage Corp.
, Case No. 2:16-cv-00965-BCW (D. Utah filed Sept. 15, 2016). In this action (now recaptioned as
In re LifeVantage Corp. Securities Litigation
), plaintiff alleges that the Company, its Chief Executive Officer and Chief Financial Officer violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by making false or misleading statements or omissions in public filings with the Securities and Exchange Commission regarding the Company's internal controls and financial results for the first, second and third quarters of fiscal year 2016. The initial complaint sought unspecified damages against the defendants on behalf of a class of purchasers of the Company’s stock between November 4, 2015 and September 13, 2016. By stipulation filed October 7, 2016, the parties agreed that defendants need not respond to the initial complaint in the action until after a lead plaintiff is appointed pursuant to the Private Securities Litigation Reform Act of 1995, at which time the parties will meet and confer regarding the timing of the filing of an amended complaint and responses thereto. On November 14, 2016, three motions for appointment as lead plaintiff were filed. On December 13, 2016, the Court appointed Dale Blanch and Yvonne Cohen as lead plaintiffs and approved their selection of lead plaintiffs’ counsel. On January 27, 2017, lead plaintiffs filed an amended complaint. Defendants must file their response thereto on or before March 13, 2017. The Company has not established a loss contingency accrual for this lawsuit as it believes liability is not probable or estimable, and the Company plans to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.
Derivative Action Lawsuit:
On October 11, 2016,
two
purported shareholder derivative actions were filed in the Third District Court of the State of Utah, Salt Lake County, entitled
Johnson v. Jensen
, Case No. 160906320 MI (Utah Dist. filed Oct. 11, 2016), and
Rupp v. Jensen
, Case No. 160906321 MI (Utah Dist. filed Oct. 11, 2016). In these actions (which are substantively identical), plaintiffs, purportedly on behalf of the Company, allege that the Company's Chief Executive Officer, Chief Financial Officer and members of the Board of Directors breached their fiduciary duties owed to the Company by, among other things, causing or permitting the Company to issue false and misleading statements or omissions in public filings with the Securities and Exchange Commission, as alleged in the class action lawsuit noted above. On October 19, 2016, the Court entered an order consolidating the two actions under the Johnson case number, with the new caption
In re LifeVantage Corp. Derivative Litigation
, providing that defendants and nominal defendant need not respond to the initial complaints and directing the parties to meet and confer within thirty days on a schedule for further proceedings in this action. On November 21, 2016, the Court approved a stipulation between the parties providing that (a) defendants and nominal defendant need not respond to the initial complaints and (b) within thirty days from the earlier of (i) the Company’s filing of its Form 10-K for fiscal year 2016 and (ii) plaintiffs’ filing of a consolidated amended complaint, the parties will meet and confer on a schedule regarding further proceedings in this action. On January 10, 2017, the Court approved a stipulation between the parties providing that this action would be deferred (
i.e.
, stayed) pending a ruling on defendants’ anticipated motion to dismiss the amended complaint in the Class Action Lawsuit. The Company notes that although the plaintiffs in this action are seeking unspecified damages against the individual defendants on behalf of the Company, the Company owes certain indemnification obligations to these individual defendants under Delaware law and existing indemnification agreements. The Company has not established a loss contingency accrual for this lawsuit as it believes liability is not probable or estimable, and the defendants plan to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.
Other Matters.
In addition to the matters described above, the Company also may become involved in other litigation and regulatory matters incidental to its business and the matters disclosed in this Quarterly Report on Form 10-Q, including, but not limited to, product liability claims, regulatory actions, employment matters and commercial disputes. The Company intends to defend itself in any such matters and does not currently believe that the outcome of any such matters will have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.
Note 7 — Related Party Transactions
During the current fiscal year, there are
three
transactions or series of similar transactions to which the Company was or is to be a party in which the amount involved will exceed
$120,000
and in which any director, executive officer, holder of more than
5%
of the Company's common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
During the
six months ended
December 31, 2016
, Dinng, a brand and digital brand studio, provided branding and marketing services to the Company pursuant to an Agreement for Services dated
August 18, 2015
between the Company and Dinng, in the amount of
$0.2 million
. The Company's Chief Marketing Officer, Ryan Goodwin, is the founder of Dinng and currently serves as Dinng’s President and Creative Director. Mr. Goodwin and his wife are both salaried employees at Dinng.
During the
six months ended
December 31, 2016
, Outhink Inc., a digital media and application development company, provided consulting services to the Company pursuant to an Agreement for Services dated
October 20, 2016
between the Company and Outhink Inc. in the amount of
$0.1 million
. David Toole, a member of the Company's board of directors, is a majority owner and serves as the Chief Executive Officer of Outhink Inc.
Effective January 2014, the Company commenced a partnership with Real Salt Lake of Major League Soccer, which includes the placement of the Company's logo on the front of the team’s jersey as well as strategic placement of the Company's logo around the stadium and on televised broadcasts of the games. In July 2015, Dell Loy Hansen, the sole owner of Real Salt Lake and Real Monarchs SLC, became a
5%
stockholder of the Company. During fiscal year
2017
, the Company will pay
$2.7 million
to Real Salt Lake pursuant to the terms of this partnership, and other various amounts for the endorsement of Real Monarchs SLC and product marketing expenses.
Note 8 — Subsequent Events
On January 18, 2017, the Company terminated the employment of Mark Jaggi, the Company's Chief Financial Officer. Also effective January 18, 2017, the Company appointed Gary Koos, through Cerius Interim Executive Solutions, to serve as the Company's interim Chief Financial Officer and its principal financial officer.