e10qsb
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
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TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000-30489
LIFEVANTAGE CORPORATION
(Exact name of Registrant as specified in its charter)
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| COLORADO
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90-0224471 |
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| (State or other jurisdiction of
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(IRS Employer Identification No.) |
| incorporation or organization) |
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6400 S. Fiddler’s Green Circle, Suite 1970 Greenwood Village, Colorado 80111
(Address of principal executive offices)
(720) 488-1711
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes þ No o
Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of
May 7, 2007 was 22,118,034.
Transitional Small Business Disclosure Format (check one): Yes o No þ
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains certain “forward-looking statements” (as such term is defined
in section 21E of the Securities Exchange Act of 1934, as amended). These statements, which
involve risks and uncertainties, reflect our current expectations, intentions or strategies
regarding our possible future results of operations, performance, and achievements.
Forward-looking statements include, without limitation: statements regarding future products or
product development; statements regarding future selling, general and administrative costs and
research and development spending; statements regarding our product development strategy; and
statements regarding future capital expenditures and financing requirements. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and applicable common law and SEC rules.
These forward-looking statements are identified in this report by using words such as “anticipate”,
“believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “predict”, “project”, “should” and
similar terms and expressions, including references to assumptions and strategies. These
statements reflect our current beliefs and are based on information currently available to us.
Accordingly, these statements are subject to certain risks, uncertainties, and contingencies, which
could cause our actual results, performance, or achievements to differ materially from those
expressed in, or implied by, such statements.
The following factors are among those that may cause actual results to differ materially from our
forward-looking statements:
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Our short operating history and lack of significant revenues from operations; |
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Our dependence on a single product for our revenue; |
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Our ability to successfully expand our operations and manage our future growth; |
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The effect of current and future government regulations and regulators on our business; |
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The effect of unfavorable publicity on our business; |
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Competition in the dietary supplement market; |
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The potential for product liability claims against us; |
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Our dependence on third party manufacturers to manufacture our product; |
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The ability to obtain raw material for our product; |
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Our ability to protect our intellectual property rights and the value of our product; |
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Our ability to continue to innovate and provide products that are useful to consumers; |
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The significant control that our management and significant shareholders exercise over us; |
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The illiquidity of our common stock; |
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Our ability to access capital markets or other adverse effects to our business and financial position; |
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Our inability to generate sufficient cash from operations or raise financing
to satisfy our liquidity requirements. Measures have been initiated to reduce cash
outflows. There is, however, no assurance that these actions will be sufficient to satisfy
liquidity requirements or that a reduction of scope will not harm our business, financial
condition or operating results; and |
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Other factors, including the other risks, uncertainties, and contingencies
under “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation” in
Item 6 of Part II of our report on Form 10-KSB/A for the year ended June 30, 2006. |
When considering these forward-looking statements, you should keep in mind the cautionary
statements in this report and the documents incorporated by reference. We have no obligation and
do not undertake to update or revise any such forward-looking statements to reflect events or
circumstances after the date of this report.
2
LIFEVANTAGE CORPORATION
INDEX
3
PART I Financial Information
Item 1. Financial Statements
LIFEVANTAGE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2007 and June 30, 2006
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(Audited) |
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(Unaudited) |
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June 30, 2006 |
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March 31, 2007 |
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(Restated*) |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
724,508 |
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$ |
228,112 |
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Marketable securities, available for sale |
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— |
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3,008,573 |
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Accounts receivable, net |
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389,916 |
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107,892 |
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Inventory |
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44,056 |
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45,001 |
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Deferred expenses |
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114,811 |
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152,677 |
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Deposit with manufacturer |
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414,912 |
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555,301 |
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Prepaid expenses |
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113,144 |
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316,659 |
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Total current assets |
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1,801,347 |
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4,414,215 |
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Property and equipment, net |
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130,626 |
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245,000 |
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Intangible assets, net |
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2,298,823 |
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2,162,042 |
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Deposits |
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320,440 |
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316,621 |
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TOTAL ASSETS |
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$ |
4,551,236 |
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$ |
7,137,878 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
333,404 |
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$ |
613,833 |
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Accrued expenses |
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403,916 |
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399,305 |
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Deferred revenue |
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802,958 |
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1,144,950 |
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Capital lease obligations, current portion |
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2,217 |
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1,985 |
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Total current liabilities |
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1,542,495 |
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2,160,073 |
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Long-term liabilities |
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Capital lease obligations, net of current portion |
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1,453 |
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3,146 |
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Total liabilities |
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1,543,948 |
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2,163,219 |
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Stockholders’ equity |
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Common stock, par value $.001,
250,000,000 shares authorized;
22,118,034 issued and outstanding |
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22,118 |
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22,118 |
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Additional paid-in capital |
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15,163,056 |
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14,018,487 |
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Accumulated (deficit) |
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(12,177,886 |
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(9,010,339 |
) |
Unrealized (loss) on securities available for sale |
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— |
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(55,607 |
) |
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Total stockholders’ equity |
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3,007,288 |
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4,974,659 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
4,551,236 |
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$ |
7,137,878 |
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*See Note 2, “Summary of Significant Accounting Policies”
The accompanying notes are an integral part of these condensed consolidated statements.
4
LIFEVANTAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the three months ended |
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For the nine months ended |
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March 31, |
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March 31, |
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2007 |
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2006 |
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2007 |
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2006 |
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Sales, net |
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$ |
995,274 |
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$ |
1,390,623 |
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$ |
4,207,518 |
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$ |
6,066,967 |
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Cost of sales |
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213,529 |
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296,089 |
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838,244 |
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1,255,691 |
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Gross profit |
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781,745 |
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1,094,534 |
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3,369,274 |
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4,811,276 |
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Operating expenses: |
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Marketing and customer service |
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504,616 |
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697,644 |
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2,605,616 |
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2,672,031 |
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General and administrative |
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806,878 |
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997,339 |
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3,606,824 |
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3,103,982 |
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Research and development |
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57,318 |
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48,276 |
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195,654 |
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48,276 |
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Depreciation and amortization |
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16,622 |
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68,526 |
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76,636 |
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238,289 |
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Total operating expenses |
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1,385,434 |
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1,811,785 |
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6,484,730 |
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6,062,578 |
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Operating (loss) |
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(603,689 |
) |
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(717,251 |
) |
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(3,115,456 |
) |
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(1,251,302 |
) |
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Other income and (expense): |
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Interest income (expense) |
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15,403 |
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50,924 |
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46,110 |
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106,172 |
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Loss on disposal of assets |
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— |
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— |
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(95,654 |
) |
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— |
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Other (expense) |
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5,953 |
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(4,584 |
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(2,547 |
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(16,512 |
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Net other income (expense) |
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21,356 |
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46,340 |
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(52,091 |
) |
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89,660 |
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Net income (loss) |
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$ |
(582,333 |
) |
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$ |
(670,911 |
) |
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$ |
(3,167,547 |
) |
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$ |
(1,161,642 |
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Net income (loss) per share,
basic and diluted |
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$ |
(0.03 |
) |
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$ |
(0.03 |
) |
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$ |
(0.14 |
) |
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$ |
(0.05 |
) |
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Weighted average shares
outstanding, basic and fully
diluted |
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22,118,034 |
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22,117,992 |
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22,118,034 |
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22,117,992 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
LIFEVANTAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the nine months ended March 31, |
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2007 |
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2006 |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
(3,167,547 |
) |
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$ |
(1,161,642 |
) |
Adjustments to reconcile net income (loss) to
net cash (used) provided by operating
activities: |
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Depreciation and amortization |
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76,636 |
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238,289 |
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Loss on disposition of assets |
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95,654 |
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4,661 |
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Stock based compensation to employees |
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1,109,869 |
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— |
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Stock based compensation to non-employees |
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34,700 |
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77,895 |
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Changes in operating assets and liabilities: |
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(Increase)/decrease in accounts receivable |
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(282,024 |
) |
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759,805 |
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Decrease in inventory |
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945 |
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35,666 |
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Decrease in deferred expenses |
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37,866 |
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— |
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Decrease in deposits to manufacturer |
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140,389 |
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405,497 |
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Decrease/(increase) in prepaid expenses |
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203,515 |
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(64,841 |
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(Increase) in other assets |
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(3,819 |
) |
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(264,952 |
) |
(Decrease)/increase in accounts payable |
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(280,429 |
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217,778 |
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Increase in accrued expenses |
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4,611 |
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174,092 |
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(Decrease)/increase in deferred revenue |
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(341,992 |
) |
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993,750 |
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Net Cash (Used) Provided by Operating Activities |
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(2,371,626 |
) |
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1,415,998 |
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Cash Flows from Investing Activities: |
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Redemption of marketable securities |
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3,064,180 |
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— |
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(Purchase) of intangible assets |
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(136,781 |
) |
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(20,906 |
) |
(Purchase) of equipment |
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(57,916 |
) |
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(128,452 |
) |
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Net Cash Provided (Used) by Investing Activities |
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2,869,483 |
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(149,358 |
) |
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Cash Flows from Financing Activities: |
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Proceeds from margin debt |
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2,093,101 |
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— |
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Repayment on margin debt |
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(2,093,101 |
) |
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— |
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Principal payments under capital lease obligation |
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(1,461 |
) |
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(717 |
) |
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Net Cash (Used) by Financing Activities |
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(1,461 |
) |
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(717 |
) |
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Increase in Cash and Cash Equivalents |
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496,396 |
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|
1,265,923 |
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Cash and Cash Equivalents – beginning of period |
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|
228,112 |
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3,385,205 |
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Cash and Cash Equivalents — end of period |
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$ |
724,508 |
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$ |
4,651,128 |
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Non Cash Investing and Financing Activities: |
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Acquisition of asset through capital lease |
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$ |
— |
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$ |
6,300 |
|
The accompanying notes are an integral part of these condensed consolidated statements.
6
LIFEVANTAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND NINE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
These unaudited Condensed Consolidated Financial Statements and Notes should be read in conjunction
with the audited financial statements and notes of Lifevantage Corporation, f/k/a Lifeline
Therapeutics, Inc. as of and for the year ended June 30, 2006 included in our Annual Report on Form
10-KSB/A.
Note 1 – Organization and Basis of Presentation:
The condensed consolidated financial statements included herein have been prepared by us, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In
the opinion of the management of Lifevantage Corporation (“LifeVantage” or the “Company”), these
interim Financial Statements include all adjustments, consisting of normal recurring adjustments,
that are considered necessary for a fair presentation of the Company’s financial position as of
March 31, 2007, and the results of operations for the three and nine month periods ended March 31,
2007 and 2006 and the cash flows for the nine month periods ended March 31, 2007 and 2006. Interim
results are not necessarily indicative of results for a full year or for any future period.
Certain prior period amounts have been reclassified to conform with our current period
presentation.
The condensed consolidated financial statements and notes included herein are presented as required
by Form 10-QSB, and do not contain certain information included in the Company’s audited financial
statements and notes for the fiscal year ended June 30, 2006 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, 2006, restated as discussed below and included in the Annual Report on
Form 10-KSB/A on file with the SEC.
Note 2 — Summary of Significant Accounting Policies:
Restatement of Financial Statements in Form 10-KSB
On March 10, 2005, the Company reached an agreement with the minority shareholder in the Company’s
81% owned subsidiary, Lifeline Nutraceuticals Corporation (“LNC”). The minority shareholder was a
former officer of LNC. In accordance with the terms of the agreement, the Company exchanged
1,000,000 shares of its Series A common stock (reclassified into common stock as of November 22,
2006) for the remaining 4,500,000 shares of LNC, representing 19% of the outstanding shares of LNC.
The closing price of the Company’s common stock on March 10, 2005 was $9.00 per share. Since the
Company’s stock had historically been thinly traded, this 1,000,000-share issuance represented a
significant block of the Company’s total outstanding shares. The Company took a marketability
discount to arrive at an estimated fair value of $5.31 per share. The acquisition of the minority
interest was previously accounted for utilizing the purchase method of accounting resulting in
goodwill of $5,310,000.
On November 10, 2006, in response to comments raised by the Staff of the Securities and Exchange
Commission (“SEC”) concerning the Company’s registration statement filed on Form SB-2 and the
Company’s valuation of goodwill and intangible assets on its financial statements, and to ensure
that its financial reporting remains in accordance with Generally Accepted Accounting Principles,
the Company’s Board of Directors concluded that it was appropriate to restate the Company’s
consolidated financial statements included in the annual report on Form 10-KSB for the fiscal year
ended June 30, 2006. The Board determined that, due to a concurrent private placement of the
Company’s common stock at $2.00 per share at about the time of the acquisition, the acquisition
cost of the minority interest in LNC should be recorded at $2,000,000. In addition, since the
Company’s motivation in purchasing
7
the minority interest in its subsidiary was to gain control over its intellectual property, the
purchase price for the acquisition should be allocated entirely to intellectual property.
The Company has reflected these revisions on the Company’s consolidated balance sheets as of June
30, 2006 and 2005 included in its restated Annual Report on Form 10-KSB/A for the fiscal year ended
June 30, 2006. The balance sheet as of March 31, 2007 also reflects the Company’s reduction of
goodwill from $5,310,000 to $0, an increase of patent costs by $2,000,000 and a reduction of
additional paid-in capital by $3,310,000.
Consolidation
The accompanying financial statements include the accounts of the Company and its wholly owned
subsidiary, LNC. All inter-company accounts and transactions between the entities have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from direct product sales to customers is recognized upon passage of title and risk of loss
to customers when product is shipped from the fulfillment facility. The Company ships the majority
of its direct sales product by United Parcel Service (“UPS”) and receives substantially all payment
for these sales in the form of credit card charges. Sales revenue and estimated returns are
recorded when product is shipped. The Company’s return policy is to provide a 30-day money back
guarantee on orders placed by customers. To date, the Company has experienced monthly returns of
approximately 2% of sales. As of March 31, 2007 and 2006, the Company’s reserve balance for
returns and allowances was approximately $98,000 and $25,000, respectively.
For retail customers, the Company analyzes its contracts to determine the appropriate accounting
treatment for its recognition of revenue on a customer by customer basis.
In July 2005, the Company entered into an agreement with General Nutrition Distribution, LP (“GNC”)
for the sale of Protandim®. Among other terms of the agreement, sales are subject to a
provision whereby the seller and buyer agree that all products shall be sold on a “sale or return”
basis whereby product can be returned by GNC for a full refund. The GNC Vendor Handbook “pledges a
100-percent guarantee by GNC to the purchasers of its products and expects vendors to do the same”.
In July 2006, the Company began the recognition of revenue under the agreement with GNC due to the
accumulation of historical data. The Company recognizes revenue and its related costs when it
obtains sufficient information to reasonably estimate the amount of future returns. Accordingly,
the Company recognizes revenue associated with sales to GNC when the product is sold by the
distributor with an allowance for future returns based on historical product return information.
Prior to July 2006, all revenue and related costs from GNC were deferred.
In July 2006, the Company entered into an agreement with CVS/pharmacy (“CVS”) for the sale of
Protandim® throughout the CVS store network. Among the terms of the agreement, one-half
of the payment for all orders is withheld by CVS until certain sell-through parameters are met. To
date, approximately $358,000 has been withheld by CVS. Since the Company does not have sufficient
history with CVS to reasonably estimate the sell-through of Protandim® within the CVS
store network,
8
50% of the revenue and related cost has been deferred under the agreement with CVS. The Company
will recognize deferred revenue and related cost of sales under the agreement with CVS when it
obtains sufficient sell-through information to reasonably estimate the amount of future returns.
The table below shows the effect of the change in the Company’s deferred revenue and expense for
the nine months ended March 31, 2007:
| |
|
|
|
|
|
|
|
|
| |
|
Deferred |
|
Deferred |
| |
|
Revenue |
|
Expense |
Deferred revenue and expense as of June 30, 2006 |
|
$ |
1,144,950 |
|
|
$ |
152,677 |
|
|
|
|
|
|
|
|
|
|
Recognition of revenue from FY2006 deferred sales |
|
|
(748,230 |
) |
|
|
(98,268 |
) |
|
|
|
|
|
|
|
|
|
Additions to deferred revenue / expense for the three
months ended September 30, 2006 |
|
|
678,960 |
|
|
|
101,627 |
|
|
|
|
|
|
|
|
|
|
Recognition of revenue due to retail sell-through in
the
three months ended September 30, 2006 |
|
|
(199,020 |
) |
|
|
(30,118 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and expense as of September 30, 2006 |
|
$ |
876,660 |
|
|
$ |
125,918 |
|
|
|
|
|
|
|
|
|
|
Additions to deferred revenue / expense for the three
months ended December 31, 2006 |
|
|
126,653 |
|
|
|
19,381 |
|
|
|
|
|
|
|
|
|
|
Recognition of revenue due to retail sell-through in
the
three months ended December 31, 2006 |
|
|
(221,910 |
) |
|
|
(33,529 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue / expenses as of December 31, 2006 |
|
$ |
781,403 |
|
|
$ |
111,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Additions to deferred revenue / expense for the three
months ended March 31, 2007 |
|
|
208,395 |
|
|
|
31,564 |
|
|
|
|
|
|
|
|
|
|
Recognition of revenue due to retail sell-through in
the
three months ended March 31, 2007 |
|
|
(186,840 |
) |
|
|
(28,523 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue / expenses as of March 31, 2007 |
|
$ |
802,958 |
|
|
$ |
114,811 |
|
| |
|
|
Accounts Receivable
The Company’s accounts receivable consist of receivables from retail distributors. Management
reviews accounts receivable on a regular basis to determine if any receivables will potentially be
uncollectible. The Company had two national retail distributors, GNC and CVS, and several regional
natural products distributors as of March 31, 2007. The Company has created an allowance for
doubtful accounts of approximately $55,000 based on aging of its retail accounts receivable.
For credit card sales to direct sales customers, the Company verifies the customer’s credit card
prior to shipment of product. Payment on credit cards is treated as a deposit in transit and is
not reflected as a receivable on the accompanying balance sheet. Based on the Company’s
verification process and historical information available, management does not believe that there
is justification for an allowance for doubtful accounts related to its direct sales as of March 31,
2007. For direct sales, there is no bad debt expense for the three or nine month periods ended
March 31, 2007.
Earnings per share
Basic earnings (loss) per share are computed by dividing the net income or loss by the weighted
average number of common shares outstanding during the period. Diluted earnings per common share
are
9
computed by dividing net income by the weighted average common shares and potentially dilutive
common share equivalents. The effects of potential common share equivalents are not included in
computations when their effect is antidilutive. Because of the net loss for the three and nine
month periods ended March 31, 2007 and 2006, the basic and diluted average outstanding shares are
the same, since including the additional shares would have an antidilutive effect on the loss per
share calculation.
Goodwill and Other Intangible Assets
The Company has adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). SFAS 142 establishes standards for accounting for goodwill and other intangibles
acquired in business combinations. Goodwill and other intangibles with indefinite lives are not
amortized.
As of March 31, 2007 and June 30, 2006, intangible assets consisted of:
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
June 30, |
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
Patent costs |
|
$ |
2,195,309 |
|
|
$ |
2,097,905 |
|
Trademark costs |
|
|
103,514 |
|
|
|
64,137 |
|
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
2,298,823 |
|
|
$ |
2,162,042 |
|
|
|
|
|
|
|
|
Stock-Based Compensation
The Company adhered to SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) prior
to July 1, 2006. SFAS 123 provides a method of accounting for stock-based compensation
arrangements, based on fair value of the stock-based compensation utilizing various assumptions
regarding the underlying attributes of the options and stock, rather than the intrinsic method of
accounting for stock-based compensation which is proscribed in Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company adopted the
modified prospective application of SFAS 123(R), “Share-Based Payment” (“SFAS 123(R)”), for all
options and warrants issued to employees and directors subsequent to June 30, 2006.
In an effort to advance the interests of the Company and its shareholders, the Company has
established its 2007 Long-Term Incentive Plan (the “Plan”) to provide incentives to certain
eligible employees who contribute significantly to the strategic and long-term performance
objectives and growth of the Company. The Plan was approved by shareholders during the November
21, 2006 shareholder meeting. Options to purchase 2,358,321 shares have been granted pursuant to
the Plan to various employees, officers, directors and Scientific Advisory Board (“SAB”) members at
a price of between $0.47 and $0.76 per share, vesting over one to three-year periods. A maximum of
6,000,000 shares of common stock can be issued under the Plan in connection with the grant of
awards.
Options granted prior to the adoption of the Plan have been terminated and new options on
substantially identical terms and provisions (i.e., identical number of underlying shares, exercise
price, vesting schedule, and expiration date as the original options) were granted under the Plan.
As no modifications to the terms and provisions of the previously granted options occurred, the
Company accounted for the related compensation expense under SFAS 123(R) as it did prior to the
effective date of the Plan.
In certain circumstances, the Company issued common stock for invoiced services, to pay creditors
and in other similar situations. In accordance with Emerging Issues Task Force 96-18 (“EITF
96-18”), payments in equity instruments to non-employees for goods or services are accounted for by
the fair value method, which relies on the valuation of the service at the date of the transaction,
or public stock sales price, whichever is more reliable as a measurement.
10
The Company granted warrants and options to various consultants and directors for services rendered
during the nine month period ended March 31, 2007. As the Company has adopted SFAS 123(R)
effective July 1, 2006, an adjustment to net income for compensation expense to recognize annual
vesting has been recorded under SFAS 123(R).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three month period ended |
|
|
Nine month period ended |
|
| |
|
March 31, |
|
|
March 31, |
|
| |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) as reported: |
|
$ |
(582,333 |
) |
|
$ |
(670,911 |
) |
|
$ |
(3,167,547 |
) |
|
$ |
(1,161,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based employee
compensation cost included in
net income (loss): |
|
|
111,566 |
|
|
|
26,870 |
|
|
|
1,144,569 |
|
|
|
77,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based employee
compensation cost that would
have been included in net
income if the fair
value-based method had been
applied to all awards: |
|
|
(111,566 |
) |
|
|
(598,803 |
) |
|
|
(1,144,569 |
) |
|
|
(888,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
as if the fair value-based
method had been applied to
all awards: |
|
$ |
(582,333 |
) |
|
$ |
(1,242,844 |
) |
|
$ |
(3,167,547 |
) |
|
$ |
(1,972,012 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully diluted
earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported: |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma: |
|
$ |
(0.03 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.14 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation expense to be recognized in the future is approximately
$735,000.
The fair value of the options granted in the three and nine month periods ended March 31, 2007 and
2006 was estimated at the date of grant using the Black-Scholes option pricing model with the
following assumptions:
| |
1. |
|
risk-free interest rate of between 4.55 and 4.97 percent in the three and nine month
periods ended March 31, 2007 and between 3.84 and 4.42 percent in the three and nine
month periods ended March 31, 2006; |
| |
| |
2. |
|
dividend yield of 0 percent; |
| |
| |
3. |
|
expected life of one to ten years in 2007 and 2006; and |
| |
| |
4. |
|
a volatility factor of the expected market price of the Company’s common stock of
between 74 and 211 percent in the three and nine month periods ended March 31, 2007
and between 187 and 263 percent in the three and nine month periods ended March 31,
2006. |
Reclassification
Certain prior period amounts have been reclassified to comply with current period presentation.
Effect of New Accounting Pronouncement
In
February 2007, SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS
159”), was issued by the Financial Accounting Standards Board (“FASB”) and is effective for
11
fiscal years beginning after November 15, 2007. SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement objectives for accounting
for financial instruments. We anticipate that SFAS 159 will not have a material impact on our
financial statements.
Note 3 –Margin Debt
In the first quarter of fiscal year 2007, the Company established a margin account to borrow
against marketable securities so that sales of these securities would not have to occur in order to
fund operating needs of the Company. The interest rate on amounts borrowed was approximately 1%
below prime.
During the third quarter, the Company liquidated its marketable securities portfolio and paid off
the margin debt. In addition to paying off the margin debt, the Company invested funds in short
term AAA rated money market Preferred Securities to maximize interest income.
Note 4 – Stockholders’ Equity
The Company’s portfolio of marketable securities declined in value as of June 30, 2006 and the
Company reported an unrealized loss of $(55,607) at that time. In accordance with SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”), the Company
accounted for the investment as “available-for-sale” securities and recorded the unrealized loss as
comprehensive income in a separate component of stockholders’ equity. During the third quarter of
fiscal year 2007, the Company liquidated its portfolio with a realized gain of approximately
$10,000. Accordingly, the previously recorded unrealized loss of $55,607 was reversed.
During the three and nine month periods ended March 31, 2007, the Company granted warrants and
options to consultants for services rendered, under EITF 96-18, “Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services” (“EITF 96-18”). Effective July 1, 2006, the Company adopted SFAS 123(R) for employees and directors. In
accordance with SFAS 123(R), payments in equity instruments for goods or services are accounted for
by the fair value method. For the three and nine months ended March 31, 2007, stock based
compensation of $111,566 and $1,144,569, respectively, was reflected as an increase to additional
paid in capital. Of the $111,566 stock based compensation for the three months ended March 31,
2007, $86,870 was employee related and $24,696 was non-employee related. Of the $1,144,569 stock
based compensation for the nine months ended March 31, 2007, $1,109,869 was employee related and
$34,700 was non-employee related. For the three and nine months ended March 31, 2006, stock based
compensation of $26,870 and $77,895, respectively, was reflected as an increase to additional paid
in capital. All of the stock based compensation for the three and nine months ended March 31, 2006
was non-employee related.
In April and May 2005, the Company issued, in a private placement, units consisting of 10,000
shares of common stock and a warrant to purchase 10,000 shares of common stock for $2.50 per share,
exercisable through April 18, 2008, to accredited investors for cash and exchange of bridge loan
notes. Each unit was offered at a purchase price equal to $2.00 per share. The private placement
was made pursuant to an agreement with an investment banking firm entered into by the Company on
January 15, 2005. The securities offered in the private placement were not registered under the
Securities Act of 1933 (the “Act”) or under the securities laws of any state. The securities
offered were “restricted securities” as defined in Rule 144 under the Act.
Pursuant to the private placement, the Company received $4,988,811 in cash from certain accredited
investors in exchange for 2,499,764 shares of common stock and an equal number of warrants. The
12
Company also issued 1,507,202 shares of its common stock and an equal number of warrants in
exchange for $3,014,372 bridge notes and accrued interest. The Company paid commissions of
$508,134 plus a $75,000 expense allowance to the investment banking firm, and issued warrants to
the investment banking firm and another placement agent to purchase 409,281 shares of common stock,
exercisable at $2.00 per share through April 18, 2008. After payment of commissions, the expense
allowance, and a fee to the escrow agent, the Company received net proceeds of $4,405,677. In
conjunction with the closing of the private placement, the Company repaid bridge notes payable with
a principal balance of $160,000 and related accrued interest of $10,733 to note holders electing to
be repaid rather than exchange their notes for units in the private placement.
The Company had an obligation to register the common stock issued in the private placement and the
shares underlying the warrants received by bridge note holders and investors in the private
placement. The Company filed a registration statement for these shares in June 2005 on Form SB-2
and subsequently amended its registration statement. On January 12, 2007, the Company’s
registration statement was declared effective.
The Company’s articles of incorporation authorize the issuance of preferred shares. However, as of
March 31, 2007, none have been issued nor have any rights or preferences been assigned to the
preferred shares by the Board of Directors.
Note 5 — Stock Option Grants and Warrants
Stock Option Grants – During the three and nine months ended March 31, 2007, the Company
granted 703,321 and 2,358,321 options to employees, officers, directors, and SAB members. Options
outstanding grant the right to purchase shares of the Company’s common stock at prices between
$0.47 and $0.76 per share. The options are not transferable and expire on various dates through
January 18, 2017. The Company adopted SFAS 123(R) beginning July 1, 2006.
Warrants – At March 31, 2007, 276,428 compensation based and 6,001,866 investment based
(i.e., warrants issued during the 2005 private placement) warrants were outstanding. There were
100,000 and 109,000 warrants granted during the three and nine months ended March 31, 2007, in
exchange for services rendered, at an exercise price ranging between $0.46 and $0.98 and expiration
dates ranging from July 31, 2008 to February 22, 2012.
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with the accompanying Financial
Statements and related notes, as well as the section entitled “Cautionary Note Regarding
Forward-Looking Statements” in our Form 10-KSB/A for the fiscal year ended June 30, 2006 and the
risk factors discussed therein. The statements contained in this report that are not purely
historical are forward-looking statements. “Forward-looking statements” include statements
regarding our expectations, hopes, intentions, or strategies regarding the future. Forward-looking
statements include statements regarding future products or product development; statements
regarding future selling, general and administrative costs and research and development spending,
and our product development strategy; statements regarding future capital expenditures and
financing requirements; and similar forward-looking statements. It is important to note that our
actual results could differ materially from those in such forward-looking statements.
Overview
This management’s discussion and analysis discusses the financial condition and results of
operations of Lifevantage Corporation f/k/a Lifeline Therapeutics, Inc. (the “Company”,
“LifeVantage”, or “we”, “us” or “our”) and its wholly-owned subsidiary, Lifeline Nutraceuticals
Corporation (“LNC”).
At the present time, we sell a single product, Protandim®. We developed
Protandim®, a proprietary blend of ingredients that has (through studies on animals and
humans) demonstrated the ability to increase the production of superoxide dismutase (“SOD”) and
catalase (“CAT”) in brain, liver, and blood. Protandim® is designed to induce the human
body to produce more of its own catalytic antioxidants, and to decrease the process of lipid
peroxidation, an indicator of oxidative stress. Each component of Protandim® has been
selected on its ability to meet these criteria. Low, safe doses of each component ensure that
unwanted additional effects that might be associated with one or another of the components are not
seen with the formulation.
We sell Protandim® directly to individuals as well as to retail stores. We began
significant sales of Protandim® in the fourth quarter ended June 30, 2005. In June
2005, the Company and Protandim® were discussed on a nationally televised news program,
which led to a substantial increase in sales. Since June 2005, sales of Protandim® have
declined on a monthly basis as we have not received continuing similar national news exposure.
Our research efforts to date have been focused on investigating various aspects and consequences of
the imbalance of oxidants and antioxidants, an abnormality which is a central underlying feature in
many disorders. We intend to continue our research, development, and documentation of
Protandim® to provide credibility to the market. We also anticipate undertaking
research, development, testing, and licensing efforts to be able to introduce additional products
in the future, although we cannot offer any assurance that we will be successful in this endeavor.
The primary manufacturing, fulfillment, and shipping components of our business are outsourced to
companies we believe possess a high degree of expertise. One advantage of outsourcing we hope to
achieve is a more direct correlation of the costs we incur to our level of product sales versus the
relatively high fixed costs of building our own infrastructure to accomplish these same tasks.
Another advantage of this structure is to minimize our commitment of resources to the human capital
required to manage these operational components successfully. Outsourcing also provides additional
capacity without significant advance notice and often at an incremental price lower than the unit
prices for the base service.
14
Recent Developments
Resignation of Chief Financial Officer
Effective February 16, 2007, Gerald J. Houston resigned as our Chief Financial Officer and from the
positions of Secretary and Treasurer. Mr. Houston agreed to provide the Board of Directors and the
Company with consulting services of up to 15 hours per week through June 15, 2007.
Hiring of Chief Executive Officer
Effective December 21, 2006, the Board of Directors appointed Mr. James J. Krejci as the Company’s
Chief Executive Officer. Mr. Krejci became a director of LifeVantage in April 2005 and became Vice
Chairman of the Board in September 2006. Prior to accepting the position as the Company’s CEO, Mr.
Krejci was President of the CheckAwards Corporation, and prior to that position, he served as
Executive Director of the Epilepsy Foundation of Colorado. Prior to these positions, he served as
Area Director and then Executive Director for the American Diabetes Association from 2002-2004.
From 1998-2002, Mr. Krejci was the CEO and Chairman of Comtec International, Inc., and prior to
that, he held general management positions at the 3M Company, General Electric, Becton-Dickinson,
Jones International/Intercable, and IGT.
Restatement
On November 10, 2006, in response to comments raised by the Staff of the Securities and Exchange
Commission (“SEC”) concerning the Company’s registration statement filed on Form SB-2 and the
Company’s valuation of goodwill and intangible assets on its financial statements, and to ensure
that its financial reporting remains in accordance with Generally Accepted Accounting Principles,
the Company’s Board of Directors concluded that it was appropriate to restate the Company’s annual
report on Form 10-KSB for the fiscal year ended June 30, 2006. The restatement resulted in
adjustments to certain amounts reported in our financial statements issued for the years ended June
30, 2006 and 2005 as well as the current filing. These adjustments affected the presentation and
classification of amounts and costs relating to certain patents, goodwill, and additional paid-in
capital on our balance sheet. In resolving the above items with the SEC, the Company also adopted
a revenue recognition policy with respect to sales of the Company’s product to distributors with
right of return provisions. Pursuant to this policy, the Company will utilize the sell-through
amounts from the Company’s distributor to the consumer to recognize revenue for such sales, and
then apply an allowance for product returns.
Registration Statement
On June 30, 2005, we filed a registration statement on Form SB-2 related to the sale by certain of
our shareholders of up to 12,323,867 shares of our common stock issued in connection with our
private placement completed in May 2005. On January 12, 2007, the Company received notification
from the Securities and Exchange Commission that its registration statement on Form SB-2 was
effective.
Three and Nine Months Ended March 31, 2007 Compared to Three and Nine Months Ended March 31, 2006
Sales We generated revenues of approximately $995,000 during the three months ended March
31, 2007 and approximately $1,391,000 during the same period of the prior fiscal year. For the
three month periods ended March 31, 2007 and 2006, cost of sales was approximately $214,000 and
$296,000 resulting in a gross profit of approximately $782,000 and $1,095,000, respectively. We
generated revenues of approximately $4,208,000 during the nine months ended March 31, 2007 and
approximately $6,067,000 during the same period of the prior fiscal year. For the nine month
periods ended March 31, 2007 and 2006, cost of sales was approximately $838,000 and $1,256,000,
resulting in a gross profit of approximately $3,369,000 and $4,811,000, respectively. A nationally
televised news program in June
15
2005, led to substantial sales during the three and nine month periods ended March 31, 2006. No
similar national news exposure occurred during the three and nine month periods ended March 31,
2007, resulting in a decrease in sales and gross profit for such periods when compared to the three
and nine months ended March 31, 2006.
Gross Margin Our gross profit percentage for the three month periods ended March 31, 2007
and 2006 was 79%. Our gross profit percentage for the nine month periods ended March 31, 2007 and
2006 was 80% and 79%, respectively. The slight increase in margin for the nine months ended March
31, 2007 is due to the recognition of higher margin distributor revenue during the period.
Operating Expenses Total operating expenses reported during the three month period ended
March 31, 2007 were approximately $1,385,000 as compared to operating expenses of approximately
$1,812,000 during the three month period ended March 31, 2006. Operating expenses decreased
approximately $427,000, primarily due to expense reduction and cost containment programs
implemented in General and Administrative and Marketing and Customer Service departments. Total
operating expenses reported during the nine month period ended March 31, 2007 were approximately
$6,485,000 as compared to operating expenses of approximately $6,063,000 during the nine month
period ended March 31, 2006. Operating expenses increased approximately $422,000 primarily due to
approximately $1,145,000 of non-cash, stock-based compensation expense incurred during the nine
month period ended March 31, 2007, offset by the decrease in expenses during the three month period
ended March 31, 2007.
Marketing and Customer Service Expenses Marketing and customer service expense decreased
from approximately $698,000 in the three months ended March 31, 2006 to approximately $505,000 in
the three months ended March 31, 2007. Marketing and customer service expense also decreased from
approximately $2,672,000 in the nine months ended March 31, 2006 to $2,606,000 in the nine months
ended March 31, 2007.
General and Administrative Expenses Our general and administrative expense decreased from
approximately $997,000 in the three months ended March 31, 2006 to approximately $807,000 in the
three months ended March 31, 2007. General and administrative expense increased from approximately
$3,104,000 in the nine months ended March 31, 2006 to approximately $3,607,000 in the nine months
ended March 31, 2007. The increase resulted from the adoption of SFAS 123(R) effective July 1,
2006. During the three months ended March 31, 2007, stock related compensation was approximately
$112,000 compared to approximately $27,000 during the three months ended March 31, 2006. During
the nine months ended March 31, 2007, stock related compensation was approximately $1,145,000
compared to approximately $78,000 during the nine months ended March 31, 2006.
Research and Development Our research and development expenditures increased to
approximately $57,000 and to approximately $196,000 in the three and nine month periods ended March
31, 2007, respectively, as a result of research, development, and documentation of the efficacy of
Protandim®. Research and development expenditures were approximately $48,000 during the
three and nine month periods ended March 31, 2006.
Depreciation and Amortization Expense Depreciation and amortization expense decreased from
approximately $69,000 during the three months ended March 31, 2006 to approximately $17,000 in the
three months ended March 31, 2007. Depreciation and amortization expense decreased from
approximately $238,000 during the nine months ended March 31, 2006 to approximately $77,000 in the
nine months ended March 31, 2007. This decrease was primarily due to a non-compete agreement which
became fully amortized during the nine months ended March 31, 2006.
16
Net Other Income and Expense We recognized net other income of approximately $21,000 in
the three months ended March 31, 2007 as compared to net other income of approximately $46,000 in
the three months ended March 31, 2006. During the nine months ended March 31, 2007, the Company
recognized net other expense of approximately $52,000 as compared to net other income of
approximately $90,000 during the nine months ended March 31, 2006. This change is largely the
result of the loss recognized from the Company’s complete disposition and replacement of its legacy
e-commerce shopping cart system during the nine months ended March 31, 2007.
Net Loss As a result of the revenues and expenses described above, the Company’s net loss
was approximately $(582,000) for the three month period ended March 31, 2007 compared to a net loss
of approximately $(671,000) for the three month period ended March 31, 2006. For the nine months
ended March 31, 2007 and 2006, the Company’s net loss was approximately $(3,168,000) and
$(1,162,000), respectively.
Our ability to finance future operations will depend on our existing liquidity (discussed in more
detail below) and, ultimately, on our ability to generate additional revenues and profits from
operations. At this time, we believe that LifeVantage has sufficient funds to operate our business
at its current level through September 30, 2007 if we are unable to successfully raise additional
equity or debt financing, increase our revenues, or further reduce expenditures. However, even if
we generate revenues at increasing levels, the revenues generated may not be greater than the
expenses we incur. Operating results will depend on several factors, including the selling price
of the product, the number of units of product sold, the costs of manufacturing and distributing
the product, the costs of marketing and advertising, and other costs, including corporate overhead,
which we will incur.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost of our planned
marketing efforts and the manufacture and sale of Protandim® and to pay our general and
administrative expenses. Our primary sources of liquidity are cash flow from the sales of our
product.
At March 31, 2007, our available liquidity was approximately $725,000, including available cash and
cash equivalents. This represents a decrease of approximately $2,512,000 from the approximately
$3,237,000 in cash, cash equivalents and marketable securities as of June 30, 2006. During the
nine months ended March 31, 2007, our net cash used by operating activities was approximately
$(2,372,000) as compared to net cash provided by operating activities of approximately $1,416,000
during the nine months ended March 31, 2006. The Company’s cash used by operating activities
during the nine month period ended March 31, 2007 decreased primarily as a result of lower sales
than in the same period during the prior fiscal year.
During the nine months ended March 31, 2007, our net cash provided by investing activities was
approximately $2,869,000, primarily due to the sale and redemption of marketable securities
available-for-sale. During the nine months ended March 31, 2006, we used approximately $(149,000)
in investing activities, primarily due to the purchase of equipment.
Cash used by financing activities during the nine months ended March 31, 2007 was approximately
$(1,500), compared to approximately $(700) during the nine months ended March 31, 2006. Cash used
in financing activities during the nine month periods ended March 31, 2007 and March 31, 2006 was
due to payments made under a capital lease obligation.
At March 31, 2007, we had working capital (current assets minus current liabilities) of
approximately $259,000, compared to working capital of approximately $2,254,000 at June 30, 2006.
The decrease in working capital was due to cash used in operating activities and our significant
operating losses incurred.
17
At December 31, 2006, we anticipated that our then-existing cash resources would be sufficient to
fund our operations through at least June 30, 2007. Based on the cost reduction initiatives that
we have undertaken to conserve our cash resources, we currently anticipate that existing cash
resources will be sufficient to fund our anticipated working capital and capital expenditure needs
through at least September 30, 2007. We base our spending in part on our expectations of future
revenue levels from the sale of Protandim®. If our revenue for a particular period is
lower than expected, we will take further steps to reduce our operating expenses accordingly. Cash
generated from operations may be insufficient to satisfy our long-term liquidity requirements, and
we may seek to sell additional public or private equity securities or obtain debt financing.
Additional financing may not be available at all or, if available, may not be obtainable on terms
favorable to us. In an effort to conserve our cash resources, we have initiated reductions in
personnel, consulting fees, advertising, and other general and administrative expenses. These
measures have reduced the scope of our planned operations by reducing our future advertising budget
to promote Protandim®. By terminating our relationships with certain professional
service organizations responsible for operations and marketing, and bringing these tasks in-house,
we could experience adverse effects on our future financial performance. At our current pace, the
Company’s existing cash resources are insufficient to fund the Company’s operations in the
long-term if we are unable to successfully raise additional equity or debt financing, increase our
revenues or further reduce expenditures. Our cash resources would run out sooner than expected if
our future revenue is lower than expected or our operating or other expenses are higher than
expected. If we are unable to obtain additional financing needed if and when cash generated from
operations is insufficient to satisfy our liquidity requirements, we may be required to reduce the
scope of our planned operations, which could harm our business, financial condition and operating
results. Additional financing may also be dilutive to our existing shareholders.
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. We base these accruals on the historical return rate since the inception of our
selling activities, and the specific historical return patterns of the product. Our return rate
since the inception of selling activities is approximately 2% of sales.
18
We offer a 30-day, money back unconditional guarantee to all direct customers. As of March 31,
2007, our March 2007 direct sales shipments of approximately $247,000 were subject to the money
back guarantee. We also replace product returned due to damage during shipment wholly at our cost,
the total of which historically has been negligible.
As the Company has begun to recognize revenue associated with sales to distributors, the Company
has also utilized its return rate experience of 2% of sales to estimate returns on its sales to
distributors.
We monitor our return estimate on an ongoing basis and may revise the allowances to reflect our
experience. Our allowance for product returns was approximately $98,000 on March 31, 2007,
compared with approximately $25,000 on March 31, 2006. To date, product expiration dates have not
played any role in product returns, and we do not expect they will in the foreseeable future
because it is unlikely that we will ship product with an expiration date earlier than the latest
allowable product return date.
Inventory Valuation We state inventories at the lower of cost or market on a first-in
first-out basis. We maintain a reserve for inventory obsolescence and we base this reserve on
assumptions about current and future product demand, inventory whose shelf life has expired and
market conditions. We may be required to make additional reserves in the event there is a change
in any of these variables. We recorded no reserves for obsolete inventory as of March 31, 2007
because our product and raw materials have a shelf life of over 3 years.
Revenue Recognition We ship the majority of our direct sales product by United Parcel
Service (“UPS”) and receive payment for those shipments in the form of credit card charges. Our
return policy is to provide a 30-day money back guarantee on orders placed by customers. After 30
days, we do not refund customers for returned product. We have experienced monthly returns
approximating 2% of sales. We record sales revenue and estimated returns upon the passage of title
and risk of loss to customers when the merchandise is shipped to the customer.
For retail customers, the Company analyzes its contracts and agreements to determine the
appropriate accounting treatment for its recognition of revenue on a customer by customer basis.
In July 2005, we entered into an agreement with GNC for the sale of Protandim®, pursuant
to which GNC has the right to return any and all product shipped to them, at any time, for any
reason. In July 2006, the Company began the recognition of revenue under the agreement with GNC
due to the accumulation of historical sell-through and return data. The Company recognizes revenue
and its related costs when it obtains sufficient information to reasonably estimate the amount of
future returns. Accordingly, the Company recognizes revenue associated with sales to GNC when the
product is sold by the distributor with an allowance for future returns based on historical product
return information. Prior to July 2006, all revenue and related costs from GNC were deferred.
In July 2006, LifeVantage entered into an agreement with CVS/pharmacy (“CVS”) for the sale of
Protandim® throughout the CVS store network. Among the terms of the agreement, one-half
of the payment for all orders is withheld by CVS until certain sell-through parameters are met.
Since inception of the agreement, CVS has withheld approximately $358,000. Since the Company does
not have sufficient history with CVS to reasonably estimate the sell-through of
Protandim® within the CVS store network, 50% of the revenue and related cost under the
agreement with CVS has been deferred. The Company will recognize deferred revenue and related cost
of sales under the agreement with CVS when it obtains sufficient sell-through information to
reasonably estimate the amount of future returns.
During the nine months ended March 31, 2007, the Company commenced sales of Protandim®
to several specialty retailers. Revenue is recognized according to the terms of each individual
agreement. Where
19
the right of return exists beyond 30 days, revenue and related cost of sales is deferred until
sufficient sell-through information is received to reasonably estimate the amount of future
returns.
Research and Development Costs We have expensed all of our payments related to research
and development activities.
Recently Issued Accounting Standards
We have reviewed all other 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. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Company’s reports is recorded, processed, summarized,
and reported within the time periods specified in the Securities and Exchange Commission’s rules
and forms, and that such information is accumulated and communicated to the Company’s management to
allow timely decisions regarding required disclosure. As of the end of the period covered by this
Report on Form 10-QSB, we evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934), under the
supervision and with the participation of our principal executive officer and principal financial
officer. Based on this evaluation, our management, including our principal executive officer and
principal financial officer, concluded that our disclosure controls and procedures were effective
as of the end of the period covered by this Report on Form 10-QSB.
There have been no changes in our internal control over financial reporting that occurred during
our fiscal quarter ended March 31, 2007 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 December 7, 2005, John Bradley commenced a lawsuit naming Lifeline Therapeutics, Inc., Lifeline
Nutraceuticals Corporation, and others as defendants in District Court, Arapahoe County, Colorado.
Mr. Bradley alleged that he is entitled to additional compensation, in the form of approximately
450,000 shares of our common stock, for services rendered to the Company and Lifeline
Nutraceuticals. Principally, the suit alleged violations of the Colorado Securities Act, breach of
contract, and fraudulent inducement.
On January 30, 2006, we filed a Motion to Dismiss Mr. Bradley’s claims with the District Court.
After written briefing and a hearing, the District Court granted this Motion, without prejudice, on
May 16, 2006.
On May 31, 2006, Mr. Bradley filed a Motion for Reconsideration of Order Granting Defendants’
Motion to Dismiss, or, in the Alternative, for New Hearing. On June 14, 2006, the Motion for
Reconsideration was denied.
The Company filed a Motion for Payment of Attorney’s Fees and on June 14, 2006, the Motion was
granted. In a letter dated September 1, 2006, Mr. Bradley agreed to pay certain amounts in respect
of legal fees to Lifeline Therapeutics, Inc., Lifeline Nutraceuticals Corporation and the other
defendants, and to file a stipulation and dismissal of the action. On October 25, 2006, a
Stipulation and Proposed Order was filed pursuant to which Mr. Bradley agreed to pay the Company
approximately $53,300 with respect to legal fees. Through March 31, 2007, the Company has
collected $33,648 of the agreed upon reimbursement.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2007, the Company granted options to purchase 703,321
shares of the Company’s common stock to certain employees, officers, directors, and SAB members
(see Notes 2 and 5). The options are exercisable for common stock at an exercise price of between
$0.47 and $0.49 per share. During the three months ended March 31, 2007, the Company granted
warrants to purchase 100,000 shares of the Company’s common stock in exchange for services rendered
at an exercise price of $0.46 (see Notes 2 and 5). For these compensatory options and warrants,
there was no underwriter involved in the transactions, and the options and warrants were issued
pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended.
Item 6. Exhibits
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10.19 |
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Confidential Termination Agreement and General Release of Claims dated February 14, 2007
between Gerald J. Houston and the Company |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
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31.2 |
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Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 |
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32.2 |
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Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LIFEVANTAGE CORPORATION |
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Date: May 14, 2007
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/s/ James J. Krejci |
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James J. Krejci |
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Chief Executive Officer |
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22
Exhibit Index
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|
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| Exhibit No. |
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Description |
|
|
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10.19
|
|
Confidential Termination Agreement and General Release of Claims dated February 14, 2007
between Gerald J. Houston and the Company |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 |
|
|
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32.2
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |