NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THREE MONTHS ENDED
SEPTEMBER 30, 2013
AND
2012
(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, 2013
included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on September 12, 2013.
Note 1 — Organization and Basis of Presentation:
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
September 30, 2013
, and the results of operations for the
three months ended
September 30, 2013
and
2012
and the cash flows for the
three months ended
September 30, 2013
and
2012
. Interim results are not necessarily indicative of results for a full year or for any future period.
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, 2013 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, 2013
, 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
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.
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 considered 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 consolidated balance sheets and transaction gains and losses are included in interest and other income (expense), net in the consolidated financial statements.
Currency translation gains and losses on intercompany balances denominated in a foreign currency are recorded as other income (expense), net. A net foreign currency loss of $
147,000
is recorded in other income (expense), net for the
three months ended
September 30, 2013
. A net foreign currency loss of $
55,000
is recorded for the
three months ended
September 30, 2012
.
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 a forward foreign exchange contract which was settled in
September 2013
and was not designated for hedge accounting. For the
three months ended
September 30, 2013
, a realized loss of $
149,000
, related to the forward contract, is recorded in other income (expense), net. The Company did not hold any derivative instruments at
September 30, 2013
.
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
The Company discloses significant concentrations of credit risk regardless of the degree of such risk. Financial instruments with significant credit risk include cash and investments. At
September 30, 2013
, the Company had
$15.4 million
in cash accounts that were held primarily at one financial institution and
$12.5 million
in accounts at other financial institutions. As of
September 30, 2013
and
June 30, 2013
the Company’s cash balances exceeded federally insured limits.
Accounts Receivable
The Company’s accounts receivable for the periods ended
September 30, 2013
and
June 30, 2013
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 related to its direct and independent distributor sales as of
September 30, 2013
is not necessary. No bad debt expense has been recorded for the periods ended
September 30, 2013
and
September 30, 2012
.
Inventory
Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. The Company has capitalized payments to its contract product manufacturer for the acquisition of raw materials and commencement of the manufacturing, bottling and labeling of its product. As of
September 30, 2013
and
June 30, 2013
, inventory consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
June 30,
2013
|
Finished goods
|
$
|
6,192
|
|
|
$
|
5,273
|
|
Raw materials
|
4,433
|
|
|
5,251
|
|
Total inventory
|
$
|
10,625
|
|
|
$
|
10,524
|
|
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 passage of title and risk of loss. Estimated returns are recorded when product is shipped. 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 unopened, unexpired product that they have purchased within the prior twelve months, subject to certain consumption limitations, 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
September 30, 2013
and
June 30, 2013
, the Company’s reserve balance for returns and allowances was approximately
$1.0 million
and
$0.6 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 all 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
three months ended
September 30, 2013
and
2012
were approximately
$0.3 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.
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.
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
three months ended
September 30, 2013
and
2012
the Company has recognized income tax expense of
$1.9 million
and
$2.7 million
, respectively, which is the Company’s estimated federal, state and foreign income tax liability. 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
three months ended
September 30, 2013
effective rate of
35.60%
and the Federal statutory rate of
35.00%
is due to state income taxes (net of federal benefit), and certain permanent differences between taxable and book income.
Income Per Share
Basic income per common share is computed by dividing the net income or loss by the weighted average number of common shares outstanding during the period. Diluted income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common share equivalents. For the three months ended
September 30, 2013
the effects of approximately
0.7 million
common shares issuable upon exercise of options 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 months ended
September 30, 2012
the effects of approximately
0.5 million
common shares issuable upon exercise of options granted pursuant to the Company’s 2007 and 2010 Long-Term Incentive Plans are not included in computations because their effect was anti-dilutive.
The following is a reconciliation of earnings 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):
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|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
Net income
|
$
|
3,256
|
|
|
$
|
4,165
|
|
Denominator:
|
|
|
|
Basic weighted-average common shares outstanding
|
114,666
|
|
|
110,867
|
|
Effect of dilutive securities:
|
|
|
|
Stock awards and options
|
3,649
|
|
|
5,652
|
|
Warrants
|
5,227
|
|
|
9,262
|
|
Diluted weighted-average common shares outstanding
|
123,542
|
|
|
125,781
|
|
Net income per share, basic
|
$
|
0.03
|
|
|
$
|
0.04
|
|
Net income per share, diluted
|
$
|
0.03
|
|
|
$
|
0.03
|
|
Segment Information
The Company operates in a single operating segment by selling products to a global network of independent distributors that operates in an integrated manner from market to market. Selling expenses are the Company’s largest expense comprised of the commissions paid to its worldwide independent distributors. The Company manages its business primarily by managing its global network of independent distributors. The Company reports revenue in
two
geographic regions: Americas and Asia/Pacific. Revenues by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2013
|
|
2012
|
Americas
|
|
$
|
34,498
|
|
|
$
|
32,306
|
|
Asia/Pacific
|
|
16,830
|
|
|
20,553
|
|
Total revenues
|
|
$
|
51,328
|
|
|
$
|
52,859
|
|
Additional information as to the Company’s revenue from operations in the most significant geographical areas is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
2013
|
|
2012
|
United States
|
|
$
|
33,479
|
|
|
$
|
32,066
|
|
Japan
|
|
$
|
14,581
|
|
|
$
|
19,532
|
|
As of
September 30, 2013
long-lived assets were
$5.0 million
in the U.S. and
$2.9 million
in Japan. As of
June 30, 2013
long-lived assets were
$4.8 million
in the U.S. and
$3.0 million
in Japan.
Effect of New Accounting Pronouncements
The Company has reviewed recently issued, but not yet effective, accounting pronouncements and does not believe any such pronouncements will have a material impact on its financial statements.
Note 3 — Stockholders’ Equity
During the
three months ended
September 30, 2013
the Company issued
1.8 million
shares of common stock, as a result of the exercise of warrants and options and
0.1 million
shares of restricted stock were surrendered as payment of tax withholding upon vesting.
On March 22, 2013 the Company announced a share repurchase program authorizing it to repurchase up to
$5 million
of shares of the Company's common stock. As part of that repurchase program, the Company entered into a pre-arranged stock repurchase plan that operated in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange. During the three months ended
September 30, 2013
the Company repurchased
1.2 million
shares. As of
September 30, 2013
, the Company had purchased the full
$5 million
in shares authorized under this repurchase program.
The Company’s Articles of Incorporation authorize the issuance of preferred shares. However, as of
September 30, 2013
, none have been issued nor have any rights or preferences been assigned to the preferred shares by the Company’s Board of Directors.
Note 4 — Share-based Compensation
Equity 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
10.0 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
$0.21
and
$1.50
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
September 30, 2013
there were awards outstanding, net of awards expired, for the purchase in aggregate of
3.6 million
shares of the Company's common stock. As of
September 30, 2013
there were
27,000
shares available for issuance under the 2007 Plan.
The Company adopted and the shareholders approved the 2010 Long-Term Incentive Plan (the “2010 Plan”), effective September 27, 2010, as amended on January 10, 2012, to provide incentives to eligible employees, directors and consultants who contribute to the strategic and long-term performance objectives and growth of the Company. A maximum of
6.9 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
$0.63
and
$3.53
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
September 30, 2013
there were awards outstanding, net of awards expired, for an aggregate of
3.0 million
shares of the Company’s common stock. As of
September 30, 2013
there were
449,000
shares available for issuance under the 2010 Plan.
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 months ended
September 30, 2013
, stock based compensation of
$0.8 million
was reflected as an increase to additional paid in capital, all of which was employee related. For the
three months ended
September 30, 2012
, stock based compensation of
$0.5 million
, was reflected as an increase to additional paid in capital, all of which was employee related.
For the
three months ended
September 30, 2013
,
no
stock options were awarded. For the
three months ended
September 30, 2012
, the fair value of stock option awards was estimated using the Black-Scholes option-pricing model with the following assumptions and weighted-average fair values:
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|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2013
|
|
2012
|
Risk-free interest rate
|
N/A
|
|
0.82% and 0.88%
|
|
Dividend yield
|
N/A
|
|
—
|
%
|
Expected life in years
|
N/A
|
|
4.0 - 6.0
|
|
Expected volatility
|
N/A
|
|
126
|
%
|
Note 5 — Contingencies
The company is occasionally involved in lawsuits and disputes arising in the normal course of business. In the opinion of management, based upon advice of counsel, the likelihood of an adverse outcome against the Company is remote. As such, management currently believes that the ultimate outcome of these lawsuits will not have a material impact on the Company's financial position or results of operations.
Note 6 — Subsequent Events
On
November 1, 2013
, the Company accepted for payment an aggregate of
16,326,530
shares of its common stock at an aggregate purchase price of
$40 million
as a result of its modified Dutch auction tender offer (the "Offer"). In connection with the Offer, on
October 18, 2013
the Company entered into a Financing Agreement providing for a term loan facility in an aggregate principal amount of up to
$47 million
(the “Term Loan”) and a delayed draw term loan facility in an aggregate principal amount not to exceed
$20 million
(the “Delayed Draw Term Loan” and collectively with the Term Loan, the "Credit Facility"). The Delayed Draw Term Loan will be available for borrowing in specified minimum amounts from time to time beginning after the effective date (as defined in the Financing Agreement) until
October 18, 2014
or until the Delayed Draw Term Loan is reduced to zero, if earlier.
The principal amount of the Term Loan is repayable in consecutive quarterly installments beginning with the calendar quarter ending
March 31, 2014
and matures on the earlier of
October 18, 2018
or such date as the outstanding loans become payable in accordance with the terms of the Financing Agreement (the “Final Maturity Date”). In the event the Company borrows under the Delayed Draw Term Loan, the outstanding principal will be repayable in consecutive quarterly installments beginning with the calendar quarter ending
December 31, 2014
through the Final Maturity Date. Each of the loans will bear 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.
The Company’s obligations under the Credit Facility are secured by a security interest in substantially all of the Company’s assets. The Company’s existing and future domestic subsidiaries have guaranteed the borrowings. Loans
outstanding under the Credit Facility (1) must be prepaid based on certain cash flow metrics and with any net proceeds of certain permitted asset sales and (2) may be prepaid in whole or in part at any time, with any prepayments made prior to the first anniversary of the effective date subject to a prepayment premium. Any principal amount of the loans which is prepaid or repaid may not be re-borrowed.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a company dedicated to helping people achieve their health, wellness and financial independence goals. We provide quality, scientifically validated products and a financially rewarding network marketing business opportunity to preferred customers and independent distributors who seek a healthy lifestyle and financial freedom. We sell our products in the United States, Japan, Hong Kong, Australia, Canada and Mexico primarily through a network of independent distributors, and to preferred customers.
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 anti-aging skin care product, and Canine Health
®
, our companion pet supplement formulated to fight oxidative stress in dogs. We currently focus our internal research efforts on oxidative stress solutions, particularly the activation of Nuclear factor (erythroid-derived 2)-like 2, also known as Nrf2, as it relates to health-related disorders. We also evaluate healthy living products developed by third party research companies that we believe are scientifically-validated and compatible with our current product offerings.
Our Products
Our products are Protandim
®
, LifeVantage TrueScience
®
and Canine Health
®
. Protandim
®
contains a proprietary blend of ingredients and has been shown to combat oxidative stress by increasing the body’s natural antioxidant protection at the genetic level, inducing the production of naturally-occurring protective antioxidant enzymes including superoxide dismutase, catalase, and glutathione synthase. LifeVantage TrueScience
®
is our science-based anti-aging skin care product, which incorporates some of the ingredients found in Protandim
®
with other proprietary ingredients. We introduced Canine Health
®
in fiscal 2013 as a supplement specially formulated to combat oxidative stress in dogs through Nrf2 activation.
We sell our Protandim
®
, LifeVantage TrueScience
®
and Canine Health
®
products through a direct selling model to independent distributors and to our preferred customers.
Customers
Because we utilize a direct selling model for the distribution of our products, the success and growth of our business is primarily based on our ability to attract new and retain existing independent distributors. Changes in our product sales are typically the result of variations in product sales volume relating to fluctuations in the number of active independent distributors and preferred customers purchasing our products. The number of active independent distributors and preferred customers is, therefore, used by management as a key non-financial measure.
The following tables summarize the changes in our active customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated. For purposes of this report, we only count as active customers those independent distributors and preferred customers who have purchased from us at any time during the most recent three-month period, either for personal use or for resale.
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|
|
|
|
|
|
|
|
|
|
|
|
Active Independent Distributors By Region
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2013
|
|
2012
|
|
Change from Prior Year
|
|
Percent Change
|
Americas
|
42,000
|
|
|
62.7
|
%
|
|
35,000
|
|
|
64.8
|
%
|
|
7,000
|
|
|
20.0
|
%
|
Asia/Pacific
|
25,000
|
|
|
37.3
|
%
|
|
19,000
|
|
|
35.2
|
%
|
|
6,000
|
|
|
31.6
|
%
|
|
67,000
|
|
|
100.0
|
%
|
|
54,000
|
|
|
100.0
|
%
|
|
13,000
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Preferred Customers By Region
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2013
|
|
2012
|
|
Change from Prior Year
|
|
Percent Change
|
Americas
|
115,000
|
|
|
82.7
|
%
|
|
114,000
|
|
|
83.2
|
%
|
|
1,000
|
|
|
0.9
|
%
|
Asia/Pacific
|
24,000
|
|
|
17.3
|
%
|
|
23,000
|
|
|
16.8
|
%
|
|
1,000
|
|
|
4.3
|
%
|
|
139,000
|
|
|
100.0
|
%
|
|
137,000
|
|
|
100.0
|
%
|
|
2,000
|
|
|
1.5
|
%
|
Three months Ended
September 30, 2013
Compared to
Three months Ended
September 30, 2012
Revenue.
We generated net revenue of
$51.3 million
during the
three months ended
September 30, 2013
and
$52.9 million
during the
three months ended
September 30, 2012
. The decrease in revenue of
$1.5 million
was primarily due to a weakening of the Japanese yen against the U.S. dollar, negatively impacting our yen-based revenue by
19.3%
. This was partially offset by increased volume of product sales in the Americas and Hong Kong. Sales in the Americas region accounted for
$2.2 million
of the increase. Our sales in Asia/Pacific region accounted for a decrease of
$3.7 million
. During the
three months ended
September 30, 2013
, all of our sales and marketing effort was directed toward building our network marketing sales.
Gross Margin.
Our gross profit percentage for the
three months ended
September 30, 2013
and
2012
was
84.8%
and
85.2%
, respectively. As a percentage of total revenues, cost of sales for the
three months ended
September 30, 2013
increased to
15.2%
from
14.8%
for the
three months ended
September 30, 2012
. The increase was primarily due to an increase in costs associated with shipping product internationally.
Operating Expenses.
Total operating expenses during the
three months ended
September 30, 2013
were
$38.4 million
as compared to operating expenses of
$38.1 million
during the
three months ended
September 30, 2012
. Operating expenses consist of sales and marketing, general and administrative, research and development, and depreciation and amortization expenses. The increase in total operating expenses was primarily due to increases in sales and marketing and depreciation and amortization expenses offset by decreases in general and administrative and research and development expenses.
Sales and Marketing Expenses.
Sales and marketing expenses during the
three months ended
September 30, 2013
were
$30.2 million
as compared to sales and marketing expenses of
$29.5 million
for the
three months ended
September 30, 2012
. The increase was due primarily to commissions paid to distributors, increased headcount costs and increased costs for distributor events. The increases were partially offset by decreases in distributor promotions.
General and Administrative Expenses.
General and administrative expenses during the
three months ended
September 30, 2013
were
$7.4 million
as compared to general and administrative expenses of
$7.9 million
for the
three months ended
September 30, 2012
. The decrease was due primarily to decreased travel and headcount related costs.
Research and Development Expenses.
Research and development expenses during the
three months ended
September 30, 2013
were
$0.3 million
as compared to research and development expenses of
$0.5 million
for the
three months ended
September 30, 2012
. The decrease was primarily due to a reduction in salaries and benefits. The recognition and timing of these expenses will be dependent upon entry into specific research and development projects.
Depreciation and Amortization Expense.
Depreciation and amortization expense during the
three months ended
September 30, 2013
was
$0.5 million
as compared to depreciation and amortization expense of
$0.2 million
for the
three months ended
September 30, 2012
. The increase was due primarily to capital acquisitions related to our continuing growth and to new leased office space in Japan.
Other Income (Expenses), Net.
During the
three months ended
September 30, 2013
we recognized net other income of
$38,000
as compared to net other expenses of
$41,000
for the
three months ended
September 30, 2012
. Net other income for the
three months ended
September 30, 2013
consisted primarily of income related to a business development incentive offset by foreign currency net losses. Net other expenses recognized during the three months ended
September 30, 2012
was primarily due to foreign currency losses.
Income Tax Expense.
We recognized income tax expense of
$1.9 million
for the
three months ended
September 30, 2013
as compared to income tax expense of
$2.7 million
for the three months ended
September 30, 2012
.
Net Income
We recorded net income of
$3.3 million
for the
three months ended
September 30, 2013
compared to net income of
$4.2 million
for the
three months ended
September 30, 2012
.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost of our planned sales and marketing efforts, the manufacture and sale of our products and to pay our general and administrative expenses. Our primary source of liquidity is cash generated from the sales of our products.
As of
September 30, 2013
, our available liquidity was
$28.0 million
, including available cash and cash equivalents. This represented an increase of
$1.7 million
from the
$26.3 million
in cash and cash equivalents as of
June 30, 2013
. During the
three months ended
September 30, 2013
, our net cash provided by operating activities was
$4.9 million
as compared to net cash provided by operating activities of
$0.9 million
during the
three months ended
September 30, 2012
. During the
three months ended
September 30, 2013
, our net cash used in investing activities was
$0.3 million
, due to the purchase of fixed assets. During the
three months ended
September 30, 2012
, our net cash used in investing activities was
$1.6 million
due to the purchases of fixed assets.
Cash used in financing activities during the
three months ended
September 30, 2013
was
$2.6 million
compared to cash provided by financing activities of
$1.2 million
during the
three months ended
September 30, 2012
. Cash used in financing activities during the three month period ended
September 30, 2013
related to the repurchase of Company stock partially offset by proceeds received from the exercise of options and warrants.
At
September 30, 2013
and
June 30, 2013
, the total amount of our foreign subsidiary cash was
$3.9 million
and
$4.2 million
, respectively.
At
September 30, 2013
, we had working capital (current assets minus current liabilities) of
$26.5 million
, compared to working capital of
$25.4 million
at
June 30, 2013
. We believe that our cash and cash equivalents balances and our ongoing cash flow from operations will be sufficient to satisfy our cash requirements for at least the next 12 months. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances and future cash flow from operations are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds. Our credit facility, however, contains covenants that restrict our ability to raise additional funds in the debt or equity markets. Additionally, we would consider realigning our strategic plans including a reduction in capital spending.
Off-Balance Sheet Arrangements
As of
September 30, 2013
, 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.
Allowances for Product Returns
We record allowances for product returns at the time we ship the product based on estimated return rates. Customers may return unopened product to us within 30 days of purchase for a refund of the purchase price less shipping and handling. As of
September 30, 2013
, our shipment of products sold totaling
$15.9 million
were subject to the return policy. In addition, we allow terminating distributors to return up to 30% of unopened, unexpired product they purchased within the prior twelve months.
We monitor our return estimate on an ongoing basis and may revise the allowances to reflect our experience. Our allowance for product returns was
$1.0 million
at
September 30, 2013
, compared with
$0.6 million
at
June 30, 2013
. To date, product expiration dates have not played any role in product returns, and we do not expect they will in the 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 value our inventory at the lower of cost or market value on a first in first out basis. Accordingly, we reduce our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new production introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.
We have recorded
$70,000
of obsolescence costs as of
September 30, 2013
, primarily for obsolete marketing materials.
Revenue Recognition
We ship the majority of our product directly to the consumer and receive substantially all payment for these sales in the form of credit card receipts. Revenue from direct product sales to customers is recognized upon passage of title and risk of loss.
Stock-Based Compensation
We use the fair value approach to account for stock-based compensation in accordance with current accounting guidance.
Research and Development Costs
We expense all of our payments related to research and development activities.
Commitments and Obligations
The following table summarizes our contractual payment obligations and commitments as of
September 30, 2013
(in thousands):
|
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Payments due by period
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
Thereafter
|
Operating Lease Obligations
|
$
|
18,646
|
|
|
$
|
2,570
|
|
|
$
|
7,897
|
|
|
$
|
3,770
|
|
|
$
|
4,409
|
|
Other
|
582
|
|
|
582
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
19,228
|
|
|
$
|
3,152
|
|
|
$
|
7,897
|
|
|
$
|
3,770
|
|
|
$
|
4,409
|
|
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.