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, 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
December 31, 2013
, and the results of operations for the
three and six months ended
December 31, 2013
and
2012
and the cash flows for the
six months ended
December 31, 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 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 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
$187,000
and $
334,000
is recorded in other income (expense), net for the
three and six months ended
December 31, 2013
.
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 2013
and were not designated for hedge accounting. For the
three and six months ended
December 31, 2013
, a realized gain of
$333,000
and $
184,000
, related to forward contracts, is recorded in other income (expense), net. The Company did not hold any derivative instruments at
December 31, 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
December 31, 2013
, the Company had
$31.1 million
in cash accounts that were held primarily at one financial institution and
$3.4 million
in accounts at other financial institutions. As of
December 31, 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
December 31, 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 customer sales as of
December 31, 2013
is not necessary. No bad debt expense has been recorded for the periods ended
December 31, 2013
and
December 31, 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
December 31, 2013
and
June 30, 2013
, inventory consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
June 30,
2013
|
Finished goods
|
$
|
6,200
|
|
|
$
|
5,273
|
|
Raw materials
|
3,643
|
|
|
5,251
|
|
Total inventory
|
$
|
9,843
|
|
|
$
|
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
December 31, 2013
and
June 30, 2013
, the Company’s reserve balance for returns and allowances was approximately
$0.8 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
six months ended
December 31, 2013
and
2012
were approximately
$0.9 million
and
$1.3 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. The fair value of performance based awards, accounted for as liabilities, to be paid in cash 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.
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, 2013
and
2012
the Company has recognized income tax expense of
$3.4 million
and
$3.0 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
six months ended
December 31, 2013
effective rate of
34.0%
and the Federal statutory rate of
35.0%
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 and six months ended
December 31, 2013
the effects of approximately
0.6 million
and
0.7 million
common shares, respectively, 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 and six months ended
December 31, 2012
the effects of approximately
0.7 million
and
0.3 million
common shares, respectively, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
3,282
|
|
|
$
|
209
|
|
|
$
|
6,538
|
|
|
$
|
4,373
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
105,770
|
|
|
113,449
|
|
|
110,218
|
|
|
112,158
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock awards and options
|
2,935
|
|
|
4,936
|
|
|
3,347
|
|
|
5,026
|
|
Warrants
|
3,687
|
|
|
8,746
|
|
|
3,798
|
|
|
8,862
|
|
Diluted weighted-average common shares outstanding
|
112,392
|
|
|
127,131
|
|
|
117,363
|
|
|
126,046
|
|
Net income per share, basic
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
Net income per share, diluted
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
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
December 31,
|
|
Six Months Ended
December 31,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Americas
|
$
|
34,418
|
|
|
$
|
32,112
|
|
|
$
|
68,916
|
|
|
$
|
64,419
|
|
Asia/Pacific
|
17,120
|
|
|
21,326
|
|
|
33,950
|
|
|
41,878
|
|
Total revenues
|
$
|
51,538
|
|
|
$
|
53,438
|
|
|
$
|
102,866
|
|
|
$
|
106,297
|
|
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
December 31,
|
|
Six Months Ended
December 31,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
United States
|
$
|
33,317
|
|
|
$
|
31,789
|
|
|
$
|
66,796
|
|
|
$
|
63,854
|
|
Japan
|
$
|
14,340
|
|
|
$
|
20,468
|
|
|
$
|
28,920
|
|
|
$
|
39,999
|
|
As of
December 31, 2013
long-lived assets were
$6.3 million
in the U.S. and
$2.5 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 — 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 “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 is 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. As of
December 31, 2013
the Company had not borrowed any amounts under the Delayed Draw Term Loan.
The principal amount of the Term Loan is payable 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 payable 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. For the
six months ended
December 31, 2013
the interest rate was
8.75%
.
The Company’s obligations under the Credit Facility are secured by a security interest in substantially all of the Company’s assets. 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.
The Credit Facility contains customary negative covenants that, among other things, restrict the Company from undertaking specified corporate actions such as, creation of liens, incurrence of additional indebtedness, making certain investments with affiliates, changes of control, having excess foreign cash, issuance of equity, repurchasing the Company's equity securities in the public markets, and making certain restricted payments, including dividends. The Credit Facility also contains various financial covenants that require the Company to maintain a certain consolidated EBITDA, certain leverage and fixed charges ratios as well as a minimum level of liquidity. Additionally, the Credit Facility contains cross-default provisions, whereby a default pursuant to the terms and conditions of certain indebtedness will cause a default on the remaining indebtedness under the Credit Facility. At
December 31, 2013
, the Company was in compliance with the covenants under its long-term indebtedness.
The Company incurred transaction costs associated with the Credit Facility totaling
$2.7 million
, of which
$69,000
was recorded in interest expense during the quarter ended
December 31, 2013
. The remaining
$2.6 million
consists of unamortized deferred debt offering costs and debt discount included in the accompanying consolidated balance sheet and are amortized to interest expense using the interest method.
The Company’s book value for the Credit Facility approximates the fair value. Aggregate future principal payments required in accordance with the terms of the Credit Facility are as follows (in thousands):
|
|
|
|
|
Year Ending June 30,
|
Amount
|
2014 (remaining six months ending June 30, 2014)
|
$
|
2,350
|
|
2015
|
4,700
|
|
2016
|
4,700
|
|
2017
|
4,700
|
|
2018
|
4,700
|
|
Thereafter
|
25,850
|
|
|
$
|
47,000
|
|
Note 4 — Stockholders’ Equity
During the
three and six months ended
December 31, 2013
the Company issued
125,000
shares of restricted stock and
2.4 million
and
4.3 million
shares, respectively, of common stock upon the exercise of warrants and options. During the
three and six months ended
December 31, 2013
48,000
and
102,000
shares, respectively, of restricted stock were canceled or 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 Act of 1934. During the
six months ended
December 31, 2013
the Company repurchased
1.2 million
shares under this repurchase authorization. As of
December 31, 2013
, the Company had purchased the full
$5 million
in shares authorized under this repurchase program.
On
November 1, 2013
, the Company accepted for payment an aggregate of
16.3 million
shares of its common stock at an aggregate purchase price of
$40 million
as a result of its modified Dutch auction tender offer (the "Tender Offer") that expired October 25, 2013. The Company incurred transaction costs of
$0.3 million
related to the Tender Offer. The Company entered into the Credit Facility to finance this repurchase, (see Note 3).
The Company’s Articles of Incorporation authorize the issuance of preferred shares. However, as of
December 31, 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 5 — Share-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
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
December 31, 2013
there were awards outstanding, net of awards expired, for the purchase in aggregate of
2.6 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 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
December 31, 2013
there were awards outstanding, net of awards expired, for an aggregate of
3.5 million
shares of the Company’s common stock.
The Company adopted a Performance Incentive Plan (the “Performance Plan”), effective July 1, 2013, 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 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 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 three annual installments which are achieved at the end of a given fiscal year only if the participant has continuously remained in service from the date of award through the end of that fiscal year. The fair value of these awards is based on the trading price of our common stock and is remeasured at each reporting period date until settlement.
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, 2013
, stock based compensation of
$0.7 million
and
$1.5 million
was reflected as an increase to additional paid in capital, all of which was employee related and
$22,000
was reflected as an increase to other accrued expenses. For the
three and six months ended
December 31, 2012
, stock based compensation of
$0.6 million
and
$1.1 million
, was reflected as an increase to additional paid in capital, all of which was employee related.
For the
six months ended
December 31, 2013
,
no
stock options were awarded. For the
six months ended
December 31, 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:
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
2013
|
|
2012
|
Risk-free interest rate
|
N/A
|
|
0.46% - 1.03%
|
|
Dividend yield
|
N/A
|
|
—
|
%
|
Expected life in years
|
N/A
|
|
3.0 - 6.0
|
|
Expected volatility
|
N/A
|
|
113% - 127%
|
|
Note 6 — 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 in any litigation currently pending 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.
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 our 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Independent Distributors By Region
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2013
|
|
2012
|
|
Change from Prior Year
|
|
Percent Change
|
Americas
|
43,000
|
|
|
62.3
|
%
|
|
35,000
|
|
|
63.6
|
%
|
|
8,000
|
|
|
22.9
|
%
|
Asia/Pacific
|
26,000
|
|
|
37.7
|
%
|
|
20,000
|
|
|
36.4
|
%
|
|
6,000
|
|
|
30.0
|
%
|
|
69,000
|
|
|
100.0
|
%
|
|
55,000
|
|
|
100.0
|
%
|
|
14,000
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Preferred Customers By Region
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2013
|
|
2012
|
|
Change from Prior Year
|
|
Percent Change
|
Americas
|
110,000
|
|
|
81.5
|
%
|
|
116,000
|
|
|
82.3
|
%
|
|
(6,000
|
)
|
|
(5.2
|
)%
|
Asia/Pacific
|
25,000
|
|
|
18.5
|
%
|
|
25,000
|
|
|
17.7
|
%
|
|
—
|
|
|
—
|
%
|
|
135,000
|
|
|
100.0
|
%
|
|
141,000
|
|
|
100.0
|
%
|
|
(6,000
|
)
|
|
(4.3
|
)%
|
Three and Six months Ended
December 31, 2013
Compared to
Three and Six months Ended
December 31, 2012
Revenue.
We generated net revenue of
$51.5 million
and
$53.4 million
during the three months ended
December 31, 2013
and
2012
, respectively. We generated net revenue of
$102.9 million
and
$106.3 million
during the
six months ended
December 31, 2013
and
2012
, respectively. Foreign currency fluctuations negatively impacted our revenue
$3.6 million
or
6.7%
and
$7.5 million
or
7.0%
during the
three and six months ended
December 31, 2013
, respectively.
Americas
. The following table sets forth revenue for the
three and six months ended
December 31, 2013
and
2012
for the Americas region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
% Change
|
|
2013
|
|
2012
|
|
% Change
|
Americas
|
$
|
34,418
|
|
|
$
|
32,112
|
|
|
7.2
|
%
|
|
$
|
68,916
|
|
|
$
|
64,419
|
|
|
7.0
|
%
|
Revenue in the Americas region for the
three and six months ended
December 31, 2013
increased
$2.3 million
or
7.2%
and
$4.5 million
or
7.0%
from the
three and six months ended
December 31, 2012
, respectively. The increase in revenue is due to higher volume of product sales in the United States compared to the prior year.
Asia/Pacific
. The following table sets forth revenue for the
three and six months ended
December 31, 2013
and
2012
for the Asia/Pacific region and its principal markets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
% Change
|
|
2013
|
|
2012
|
|
% Change
|
Japan
|
$
|
14,340
|
|
|
$
|
20,468
|
|
|
(29.9
|
)%
|
|
$
|
28,920
|
|
|
$
|
39,999
|
|
|
(27.7
|
)%
|
Hong Kong
|
1,900
|
|
|
—
|
|
|
100.0
|
%
|
|
3,594
|
|
|
—
|
|
|
100.0
|
%
|
Other
|
880
|
|
|
858
|
|
|
2.6
|
%
|
|
1,436
|
|
|
1,879
|
|
|
(23.6
|
)%
|
Asia/Pacific Total
|
$
|
17,120
|
|
|
$
|
21,326
|
|
|
(19.7
|
)%
|
|
$
|
33,950
|
|
|
$
|
41,878
|
|
|
(18.9
|
)%
|
Revenue in the region for the
three and six months ended
December 31, 2013
was negatively impacted approximately
$3.5 million
or
16.5%
and
$7.4 million
or
17.6%
, respectively, by foreign currency exchange rate fluctuations. Additional decreases are attributable to lower volume of product sales in Japan.
During the
three and six months ended
December 31, 2013
the Japanese yen continued to weaken against the U.S. dollar, negatively impacting our revenue in this market by
$3.4 million
or
16.8%
and
$7.2 million
or
18.0%
, respectively. This was partially offset by increased sales of
$1.9 million
and
$3.6 million
, respectively, as a result of our launch of the Hong Kong market.
All of our sales and marketing efforts were directed toward building our network marketing sales. We expect to continue to focus our efforts on strengthening our distributor and preferred customer culture to promote growth and retention, developing new products, and expanding our reach geographically into new markets.
Gross Margin.
Our gross profit percentage for the three months ended
December 31, 2013
and
2012
was
84.6%
and
72.5%
, respectively. Our gross profit percentage for the
six months ended
December 31, 2013
and
2012
was
84.7%
and
78.8%
, respectively.
As a percentage of total revenues, cost of sales for the
three months ended
December 31, 2013
decreased to
15.4%
from
27.5%
for the three months ended
December 31, 2012
and for the
six months ended
December 31, 2013
decreased to
15.3%
from
21.2%
for the
six months ended
December 31, 2012
. The decrease was primarily due to product recall costs of
$5.9 million
recorded in
December 2012
.
Operating Expenses.
Total operating expenses during the
three months ended
December 31, 2013
were
$38.4 million
as compared to operating expenses of
$38.3 million
during the
three months ended
December 31, 2012
. Total operating expenses during the
six months ended
December 31, 2013
were
$76.9 million
as compared to operating expenses of
$76.5 million
during the
six months ended
December 31, 2012
.
Operating expenses consist of sales and marketing, general and administrative, research and development, and depreciation and amortization expenses. Primary factors that may cause our operating expenses to fluctuate include changes in the number of employees, foreign exchange rates, and the impact of our variable compensation programs, which are driven by overall operating results. A fluctuation in our stock price may also impact our share-based compensation expense that is related to liability classified awards. The increase in total operating expenses for the
three months ended
December 31, 2013
was primarily due to increases in general and administrative and sales and marketing expenses. The increase for the
six months ended
December 31, 2013
was primarily due to higher sales and marketing expenses.
We expect our operating expenses, as a percent of revenue, to remain relatively consistent with the current period results.
Sales and Marketing Expenses.
Sales and marketing expenses during the
three months ended
December 31, 2013
were
$29.8 million
as compared to sales and marketing expenses of
$29.6 million
for the
three months ended
December 31, 2012
. Sales and marketing expenses during the
six months ended
December 31, 2013
were
$60.0 million
as compared to sales and marketing expenses of
$59.1 million
for the
six months ended
December 31, 2012
.
The increase in sales and marketing expenses for the
three and six months ended
December 31, 2013
was due primarily to increased costs for distributor incentives, commissions, and promotions, including the introduction of the MyLifeVenture program in Japan. The increases were partially offset by a decrease in costs associated with distributor events and branding.
We expect our sales and marketing expenses to increase slightly during the remainder of fiscal
2014
, as compared to the same period in fiscal
2013
, as we continue to focus our efforts on increasing revenue through growth and retention both domestically and internationally.
General and Administrative Expenses.
General and administrative expenses during the
three months ended
December 31, 2013
were
$7.6 million
as compared to general and administrative expenses of
$7.5 million
for the
three months ended
December 31, 2012
. General and administrative expenses during the
six months ended
December 31, 2013
were
$15.0 million
as compared to general and administrative expenses of
$15.4 million
for the
six months ended
December 31, 2012
.
The increase in general and administrative expenses during the three months ended
December 31, 2013
was due primarily to an increase in salaries and wages as compared to the prior year same period that resulted from a reduction in our estimated incentive payout that occurred during the three months ended
December 31, 2012
. Additional increases were due to higher costs associated with professional services and bank fees. These increases were offset by a reduction in costs associated with recruiting, legal fees, and rents.
The decrease in general and administrative expenses during the
six months ended
December 31, 2013
was due primarily to a decrease in costs associated with recruiting and outsourcing costs related to the Japan market. The decreases were offset by increases in salaries and wages and professional services.
Research and Development Expenses.
Research and development expenses during the
three months ended
December 31, 2013
were
$0.6 million
as compared to research and development expenses of
$0.7 million
for the
three months ended
December 31, 2012
. Research and development expenses during the
six months ended
December 31, 2013
were
$0.9 million
as compared to research and development expenses of
$1.3 million
for the
six months ended
December 31, 2012
.
The decrease in research and development expenses during the
three and six months ended
December 31, 2013
was primarily due to a reduction in salaries and benefits related to the retirement of Dr. McCord. The decrease was partially offset by increases in professional services costs related to new product development.
The recognition and timing of these expenses will be dependent upon entry into specific research and development projects. We expect our research and development expenses to increase slightly during the remainder of fiscal
2014
, as compared to the same period in fiscal
2013
, as a result of our continued efforts in new product development.
Depreciation and Amortization Expense.
Depreciation and amortization expense during the
three months ended
December 31, 2013
was
$0.5 million
as compared to depreciation and amortization expense of
$0.4 million
for the
three months ended
December 31, 2012
. Depreciation and amortization expense during the
six months ended
December 31, 2013
was
$1.0 million
as compared to depreciation and amortization expense of
$0.7 million
for the
six months ended
December 31, 2012
.
While depreciation and amortization remained relatively consistent with the prior year, the slight increase was due primarily to capital acquisitions related to our continued growth and to new leased office space in Japan.
Other Income (Expenses), Net.
During the
three and six months ended
December 31, 2013
we recognized net other expenses of
$0.4 million
and
$0.3 million
, respectively. Net other income for the
three and six months ended
December 31, 2013
consisted primarily of interest expense offset by income related to a business development incentive and by foreign currency gains and losses.
The following table sets forth interest expense for the
three and six months ended
December 31, 2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
December 31,
|
|
For the Six Months Ended
December 31,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Contractual interest expense:
|
|
|
|
|
|
|
|
2013 Term Loan
|
$
|
753
|
|
|
$
|
—
|
|
|
$
|
753
|
|
|
$
|
—
|
|
Amortization of deferred financing fees:
|
|
|
|
|
|
|
|
2013 Term Loan
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
Amortization of debt discount:
|
|
|
|
|
|
|
|
2013 Term Loan
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Other
|
11
|
|
|
—
|
|
|
14
|
|
|
—
|
|
Total interest expense
|
$
|
833
|
|
|
$
|
—
|
|
|
$
|
836
|
|
|
$
|
—
|
|
Income Tax Expense
. We recognized income tax expense of
$1.5 million
and
$3.4 million
for the
three and six months ended
December 31, 2013
as compared to income tax expense of
$0.3 million
and
$3.0 million
for the
three and six months ended
December 31, 2012
.
Our provision for income taxes for the
three and six months ended
December 31, 2013
consisted primarily of federal, state and foreign tax on anticipated fiscal
2014
income which was partially offset by a tax benefit related to domestic production activities deduction.
Liquidity and Capital Resources
Liquidity
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, to pay our general and administrative expenses, and to service our debt. Our primary source of liquidity is cash generated from the sales of our products.
As of
December 31, 2013
, our available liquidity was
$34.5 million
, including available cash and cash equivalents. This represented an increase of
$8.2 million
from the
$26.3 million
in cash and cash equivalents as of
June 30, 2013
.
During the
six months ended
December 31, 2013
, our net cash provided by operating activities was
$6.9 million
as compared to net cash provided by operating activities of
$6.4 million
during the
six months ended
December 31, 2012
.
During the
six months ended
December 31, 2013
, our net cash used in investing activities was
$0.7 million
, due to the purchase of fixed assets. During the
six months ended
December 31, 2012
, our net cash used in investing activities was
$3.9 million
due to the purchases of fixed assets.
Cash provided by financing activities during the
six months ended
December 31, 2013
was
$2.3 million
compared to cash provided by financing activities of
$1.3 million
during the
six months ended
December 31, 2012
. Cash provided by financing activities during the
six months ended
December 31, 2013
related to the proceeds from the 2013 Term Loan and proceeds from the exercise of stock options and warrants. The increase was offset by the repurchase of company stock and fees paid in connection with the 2013 Term Loan.
At
December 31, 2013
and
June 30, 2013
, the total amount of our foreign subsidiary cash was
$4.1 million
and
$4.2 million
, respectively.
At
December 31, 2013
, we had working capital (current assets minus current liabilities) of
$30.9 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 and repurchase our equity securities in the public markets. Additionally, we would consider realigning our strategic plans including a reduction in capital spending.
Capital Resources
On
October 18, 2013
, we entered into a Financing Agreement providing for a term loan facility in an aggregate principal amount of
$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. As of
December 31, 2013
we had not borrowed any amounts under the Delayed Draw Term Loan.
The Credit Facility contains customary negative covenants that, among other things, restrict us from undertaking specified corporate actions such as, creation of liens, incurrence of additional indebtedness, making certain investments with affiliates, changes of control, having excess foreign cash, issuance of equity, repurchasing our equity securities in the public markets, and making certain restricted payments, including dividends.
The Credit Facility also contains various financial covenants that require us to maintain a certain consolidated EBITDA, certain leverage and fixed charges ratios as well as a minimum level of liquidity. Specifically, we must:
|
|
•
|
Have a consolidated EBITDA (as defined in the Financing Agreement) amount greater than
$5 million
for the quarter ended
December 31, 2013
;
|
|
|
•
|
Have a total leverage ratio (as defined in the Financing Agreement) of less than
2.37
to
1.00
for the quarter ended
December 31, 2013
. Our leverage ratio requirement decreases over time to
1.25
to
1.00
for the quarter ended
June 30, 2016
, and remains level thereafter;
|
|
|
•
|
Have a fixed charge ratio (as defined in the Financing Agreement) of greater than
1.20
to
1.00
for the quarter ended
December 31, 2013
. Our fixed charge requirement remains level through the quarter ended
December 31, 2014
, after which it increases to
1.25
to
1.00
thereafter; and
|
|
|
•
|
Have no less than $10 million in unrestricted cash and cash equivalents at any time when the total leverage ratio is greater than 1.25 to 1.00.
|
At
December 31, 2013
, we were in compliance with the applicable financial and restrictive covenants under the Credit Facility. Additionally, management anticipates that in the normal course of operations, we will be in compliance with the financial and restrictive covenants during the ensuing year.
Off-Balance Sheet Arrangements
As of
December 31, 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
December 31, 2013
, our shipment of products sold totaling
$15.8 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
$0.8 million
at
December 31, 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
$385,000
of obsolescence costs as of
December 31, 2013
.
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. We recognize compensation costs for awards with performance conditions when we conclude it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each balance sheet date and adjust compensation costs based on our probability assessment.
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
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligations
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
Thereafter
|
Long-term debt obligations
|
$
|
47,000
|
|
|
$
|
4,700
|
|
|
$
|
14,100
|
|
|
$
|
28,200
|
|
|
$
|
—
|
|
Interest on long-term debt obligations
|
15,457
|
|
|
4,012
|
|
|
9,544
|
|
|
1,901
|
|
|
—
|
|
Operating lease obligations
|
17,941
|
|
|
2,542
|
|
|
7,318
|
|
|
3,781
|
|
|
4,300
|
|
Total
|
$
|
80,398
|
|
|
$
|
11,254
|
|
|
$
|
30,962
|
|
|
$
|
33,882
|
|
|
$
|
4,300
|
|
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We conduct business in several countries and intend to continue to grow our international operations. Net sales, operating income, and net income are affected by fluctuations in currency exchange rates and other uncertainties in doing business and selling products in more than one currency.
In addition, our operations are exposed to risks associated with changes in social, political and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where we have operations, as well as, to a lesser extent, changes in U. S. laws and regulations relating to international trade and investment.
Foreign Currency Risk
During the
six months ended
December 31, 2013
, approximately
35.1%
of our net sales were realized outside of the United States. The local currency of each international subsidiary is generally the functional currency. All revenues and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. Given the large portion of our business derived from Japan, any weakening of the Japanese Yen will negatively impact our reported revenue and profits, whereas a strengthening of the Japanese Yen will positively impact our reported revenue and profits. Because of the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition. Changes in various currency exchange rates affect the relative prices at which we sell our products. We regularly monitor our foreign currency risks and periodically take measures to reduce the risk of foreign exchange rate fluctuations on our operating results. Additionally, we may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts. We do not use derivative financial instruments for trading or speculative purposes. At
December 31, 2013
we did not have any derivative instruments.
Interest Rate Risks
As of
December 31, 2013
, we had
$47 million
in variable rate debt issued pursuant to the Financing Agreement we entered into on
October 18, 2013
. Based on the amount of our variable debt as of
December 31, 2013
, a hypothetical
100
basis point increase or decrease in interest rates on our variable rate debt would increase or decrease our annual interest expense by approximately
$0.5 million
. This change in market risk exposure was driven by our borrowings in connection with our repurchase of shares of our common stock under the Tender Offer.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to ensure that the information required to be disclosed in the reports we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (b) accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness and design and operation of such disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of
December 31, 2013
.
Changes In Internal Control over Financial Reporting
An evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 of the Exchange Act was also performed under the supervision and with the participation of our management, including our CEO and CFO, of any change in our internal control over financial reporting that occurred during our last fiscal quarter. That evaluation did not identify any changes in our internal control over financial reporting during the three months ended
December 31, 2013
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II Other Information
Item 1. Legal Proceedings
On November 20, 2013, we 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, we allege defendants breached a contract and misappropriated our trade secrets. On January 21, 2014, the defendants filed an answer and counterclaim in response to our complaint. Defendants' answer and counterclaims allege defamation and tortious interference with economic relations, which the defendants claim resulted in damages of not less than $20,000,000. We believe the counterclaims alleged by the defendants are completely without merit and we intend to vigorously defend against them.
Item 1A. Risk Factors
The following description of risk factors includes any material changes to, and, if applicable, supersedes the description of, risk factors associated with our business previously disclosed in “Part I. Item 1A — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013, and it supplements and should be read in conjunction with the detailed discussion of risks associated with our business in our recent SEC filings, including the risk factors discussed in “Part I. Item 1A — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.
Our new credit facility includes debt service obligations and restrictive covenants that could impede our operations and flexibility.
We entered into a Financing Agreement on
October 18, 2013
that provides for a term loan facility in an aggregate principal amount of up to
$47 million
and a delayed draw term loan facility in an aggregate principal amount not to exceed
$20 million
(collectively, the "Credit Facility"). The principal amount borrowed under the Credit Facility is payable in consecutive quarterly installments beginning with the calendar quarter ending
March 31, 2014
. We expect to generate the cash necessary to pay the principal and interest on the Credit Facility from our cash flows provided by operating activities. However, our ability to meet our debt service obligations will depend on our future performance, which may be affected by financial, business, economic, demographic and other factors. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our debt, sell assets, borrow more money or raise cash through the sale of equity. In such an event, we may not be able to refinance our debt, sell assets, borrow more money or raise cash through the sale of equity on terms acceptable to us or at all. Also, our ability to carry out any of these activities on favorable terms, if at all, may be further impacted by any financial or credit crisis which may limit access to the credit markets and increase the cost of capital.
The Credit Facility is secured by a lien on substantially all of our assets, and the assets of our subsidiaries, and contains customary covenants, including covenants that restrict our ability to incur or guarantee additional indebtedness, pay dividends on and redeem capital stock, repurchase our equity securities in the public markets, make other payments, including investments, sell our assets and enter into consolidations, mergers or transfers of all or substantially all of our assets. The Credit Facility includes financial covenants that require us to maintain specified financial ratios and satisfy certain financial condition tests. Our ability to meet these financial ratios and tests can be affected by events beyond our control and we may be unable to meet these ratios and tests. A breach of any of the covenants, ratios, tests or restrictions imposed by the Credit Facility would result in an event of default and the lender could declare all amounts outstanding under the Credit Facility to be immediately due and payable. Our assets may not be sufficient to repay the indebtedness if the lenders accelerate our repayment of the indebtedness under the Credit Facility.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, we issued 1,438,999 unregistered shares of our common stock upon the exercise of various warrants. The shares issued were exempt from registration under the Securities Act of 1933 pursuant to Section 3(a)(9) thereof.
The following table provides information with respect to purchases we made of shares of our common stock during the quarter ended December 31, 2013.
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Period
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(a) Total
Number of
Shares
(or Units)
Purchased (2)
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(b) Average Price
Paid per Share (or
Unit) (1)
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(c) Total Number
of Shares
(or Units) Purchased
as Part of Publicly
Announced Plans or
Programs (2)
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(d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
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October 1, 2013 to October 31, 2013
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16,326,530
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$
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2.45
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16,326,530
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$
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—
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November 1, 2013 to November 30, 2013
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—
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$
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—
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—
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$
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—
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December 1, 2013 to December 31, 2013
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—
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$
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—
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—
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$
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—
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Total
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16,326,530
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$
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2.45
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16,326,530
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(1)
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Average price paid per share of common stock repurchased is the execution price, including commissions paid to brokers.
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(2)
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On September 24, 2013, we commenced the tender offer in which we sought to acquire up to $40.0 million in value of our common stock at a purchase price not greater than $2.80 nor less than $2.45 per share. The tender offer expired at 5:00 p.m. New York City time on October 25, 2013 and in connection therewith, on November 1, 2013, we repurchased 16,326,530 shares of our common stock at a price of $2.45 per share.
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During the quarter ended December 31, 2013, we withheld 8,863 shares to satisfy tax withholding obligations in connection with the partial vesting of restricted stock awards.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See the exhibit index immediately following the signature page of this report.