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 DECEMBER 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
incorporation or organization)
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(IRS Employer Identification No.) |
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6400 S. Fiddlers Green Circle, Suite 1970 Greenwood Village, Colorado 80111
(Address of principal executive offices)
(720) 488-1711
(Registrants telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the issuers common stock, par value $0.001 per share, as of
January 31, 2008 was 22,418,034.
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 (the Exchange Act)).
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 limited operating history and lack of significant revenues from
operations; |
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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 the Company; |
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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 dependence on a limited number of significant customers and a single
product for our revenue; |
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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; and |
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Other factors not specifically described above, including the other risks,
uncertainties, and contingencies under Description of Business, Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operation in
Item 6 of Part II of our report on Form 10-KSB for the year ended June 30, 2007. |
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
December 31, 2007 and June 30, 2007
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(Unaudited) |
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(Audited) |
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December 31, 2007 |
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June 30, 2007 |
ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
142,036 |
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$ |
160,760 |
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Marketable securities, available for sale |
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1,475,000 |
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Accounts receivable, net |
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151,567 |
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398,463 |
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Inventory |
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34,943 |
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27,834 |
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Deferred expenses |
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71,025 |
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117,807 |
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Deposit with manufacturer |
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329,236 |
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388,791 |
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Prepaid expenses |
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95,019 |
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60,175 |
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Total current assets |
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2,298,826 |
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1,153,830 |
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Property and equipment, net |
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80,036 |
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108,915 |
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Intangible assets, net |
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2,295,109 |
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2,311,110 |
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Deferred debt offering costs, net |
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236,089 |
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Deposits |
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93,588 |
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340,440 |
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TOTAL ASSETS |
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$ |
5,003,648 |
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$ |
3,914,295 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
187,778 |
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$ |
148,699 |
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Accrued expenses |
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488,887 |
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230,811 |
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Deferred revenue |
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507,450 |
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818,250 |
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Capital lease obligations, current portion |
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2,037 |
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2,301 |
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Total current liabilities |
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1,186,152 |
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1,200,061 |
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Long-term liabilities |
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Capital lease obligations, net of current portion |
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846 |
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Convertible debt |
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221,193 |
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Total liabilities |
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1,407,345 |
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1,200,907 |
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Commitments and Contingencies |
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Stockholders equity |
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Preferred stock, par value $.001,
50,000,000 shares authorized;
no shares issued or outstanding |
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Common stock, par value $.001,
250,000,000 shares authorized;
22,378,034 and 22,268,034 issued and
outstanding as of December 31, 2007 and
June 30, 2007, respectively |
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22,378 |
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22,268 |
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Additional paid-in capital |
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16,978,325 |
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15,395,037 |
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Accumulated (deficit) |
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(13,404,400 |
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(12,703,917 |
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Total stockholders equity |
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3,596,303 |
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2,713,388 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
5,003,648 |
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$ |
3,914,295 |
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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 six months ended |
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December 31, |
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December 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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$ |
796,409 |
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$ |
1,136,763 |
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$ |
1,603,733 |
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$ |
3,212,244 |
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Cost of sales |
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186,019 |
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249,164 |
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363,322 |
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624,715 |
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Gross profit |
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610,390 |
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887,599 |
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1,240,411 |
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2,587,529 |
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Operating expenses: |
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Marketing and customer service |
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388,673 |
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1,068,185 |
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663,121 |
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2,101,000 |
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General and administrative |
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478,982 |
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1,392,320 |
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904,522 |
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2,799,946 |
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Research and development |
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28,259 |
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72,653 |
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218,889 |
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138,336 |
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Depreciation and amortization |
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59,394 |
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30,582 |
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98,885 |
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60,014 |
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Loss on disposal of assets |
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93,854 |
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93,854 |
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Total operating expenses |
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955,308 |
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2,657,594 |
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1,885,417 |
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5,193,150 |
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Operating loss |
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(344,918 |
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(1,769,995 |
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(645,006 |
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(2,605,621 |
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Other income and (expense): |
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Interest income (expense), net |
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(56,861 |
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5,155 |
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(55,477 |
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30,707 |
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Other |
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(166 |
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(10,301 |
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Net other income (expense) |
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(56,861 |
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4,989 |
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(55,477 |
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20,406 |
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Net loss |
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$ |
(401,779 |
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$ |
(1,765,006 |
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$ |
(700,483 |
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$ |
(2,585,215 |
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Net loss per share, basic and diluted |
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($0.02 |
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($0.08 |
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($0.03 |
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($0.12 |
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Weighted average shares outstanding,
basic and fully diluted |
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22,316,893 |
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22,118,034 |
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22,292,463 |
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22,118,034 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
LIFEVANTAGE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the six months ended December 31, |
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2007 |
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2006 |
Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
(700,483 |
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$ |
(2,585,215 |
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Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities: |
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Depreciation and amortization |
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98,885 |
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60,014 |
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Loss on disposition |
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93,854 |
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Stock based compensation to employees |
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130,799 |
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Stock based compensation to non-employees |
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31,791 |
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1,033,002 |
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Changes in operating assets and liabilities: |
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Decrease/(increase)in accounts receivable |
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246,896 |
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(278,861 |
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(Increase) in inventory |
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(7,109 |
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(9,599 |
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Decrease in deposits to manufacturer |
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59,555 |
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105,865 |
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(Increase)/decrease in prepaid expenses |
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(34,844 |
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80,925 |
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Decrease/(increase) in other assets |
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246,852 |
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(8,819 |
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Increase/(decrease) in accounts payable |
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10,189 |
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(166,045 |
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Increase/(decrease) in interest payable |
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28,890 |
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Increase in accrued expenses |
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258,076 |
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8,177 |
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(Decrease) in deferred revenue |
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(310,800 |
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(363,547 |
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Decrease in deferred expenses |
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46,782 |
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40,907 |
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Net Cash Provided (Used) by Operating Activities |
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105,479 |
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(1,989,342 |
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Cash Flows from Investing Activities: |
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Redemption of marketable securities |
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50,000 |
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1,248,612 |
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(Purchase) of marketable securities |
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(1,525,000 |
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Purchase of intangible assets |
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(33,405 |
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(93,738 |
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Purchase of equipment |
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(122 |
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(50,235 |
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Net Cash (Used) Provided by Investing Activities |
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(1,508,527 |
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1,104,639 |
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Cash Flows from Financing Activities: |
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Proceeds from margin debt |
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1,731,754 |
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Repayment on margin debt |
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(948,172 |
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Capitalized Interest expense |
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46,939 |
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Principal payments under capital lease obligation |
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(1,110 |
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(956 |
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Issuance of common stock |
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10,575 |
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Private Placement fees |
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(162,080 |
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Proceeds from issuance of private placement of convertible debentures and warrants |
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1,490,000 |
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Net Cash Provided by Financing Activities |
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1,384,324 |
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782,626 |
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Increase/(decrease) in cash |
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(18,724 |
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(102,077 |
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Cash and Cash Equivalents beginning of period |
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160,760 |
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228,112 |
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Cash and Cash Equivalents end of period |
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$ |
142,036 |
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$ |
126,035 |
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Non Cash Investing and Financing Activities: |
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Warrants issued for private placement
fees for convertible debentures |
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$ |
94,488 |
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$ |
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Acquisition of asset through capital lease |
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$ |
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$ |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid for interest expense |
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$ |
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$ |
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Cash paid for income taxes |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated statements.
6
LIFEVANTAGE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 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 as of and
for the year ended June 30, 2007 included in our Annual Report on Form 10-KSB.
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 Companys
financial position as of December 31, 2007, and the results of operations for the three and six
month periods ended December 31, 2007 and 2006 and the cash flows for the six month periods ended
December 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 to
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 Companys audited
financial statements and notes for the fiscal year ended June 30, 2007 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, 2007, and included in the Annual Report on Form
10-KSB on file with the SEC.
On September 26, and October 31, 2007 the Company issued debentures convertible into the
Companys common stock in a private placement offering. The net proceeds received by the Company
from the offering of $1,327,920 will be used to expand marketing efforts, scientific studies and
intellectual property protection, as well as to provide the Company with additional working
capital. The funding significantly improves the Companys liquidity position from June 30, 2007
levels and allows the Company to pursue plans for generating additional revenue while containing
cash outflow. However, there can be no assurance that revenue generation and cost containment
measures will result in positive cash flow.
Note 2 Summary of Significant Accounting Policies:
Consolidation
The accompanying financial statements include the accounts of the Company and its wholly-owned
subsidiary Lifeline Nutraceuticals Corporation (LNC). All inter-company accounts and transactions
between the entities have been eliminated in consolidation.
7
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements. Actual results could differ from those estimates.
Revenue Recognition
The Company ships the majority of its product sales directly to the consumer via United Parcel
Service (UPS) and receives substantially all payment for these sales in the form of credit card
charges. Revenue from direct product sales to customers is recognized upon passage of title and
risk of loss to customers when product is shipped from the fulfillment facility. Sales revenue and
estimated returns are recorded when product is shipped. The Companys return policy is to provide
a 30-day money back guarantee on orders placed by customers. After 30 days, we do not refund direct
sales customers for returned product. To date, the Company has experienced monthly returns of
approximately 2% of sales. As of December 31, 2007 and June 30, 2007, the Companys reserve
balance for returns and allowances was approximately $143,000 and $113,000, 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, we entered into an agreement with General Nutrition Distribution, LP (GNC) for
the sale of Protandim®, pursuant to which GNC has the right to return any and all product shipped
to GNC, 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, beginning July 1, 2006, the Company
recognizes revenue associated with sales to GNC when the product is sold by GNC 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. One-half of the payment for all orders was withheld
by CVS until certain sell-through parameters were met. Since inception of the agreement, CVS
withheld approximately $358,000. The Company did not have sufficient history with CVS to
reasonably estimate the sell-through of Protandim® within the CVS store network, and accordingly
consistent with the terms of the agreement, 50 percent of the revenue and related cost under the
agreement with CVS was deferred. During the three months ended December 31, 2007, the Company
began discussions with CVS for the return of some of the product in CVS stores that had not been
sold. The Company granted a return authorization to CVS for the return of bottles of Protandim®
until January 31, 2008. As of December 31, 2007, no bottles were shipped from CVS to LifeVantage.
However, it is anticipated that a sufficient number of bottles will be returned to completely
offset the Companys current receivable from CVS. Accordingly, deferred revenue and the CVS
receivable were reversed as of December 31, 2007.
The table below shows the effect of the change in the Companys deferred revenue and expense for
the six months ended December 31, 2007 including the impact of the reversal of the CVS deferred
revenue and receivable:
8
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Deferred |
|
|
Revenue |
|
Expense |
Deferred revenue and expense as of June 30, 2007 |
|
$ |
818,250 |
|
|
$ |
117,807 |
|
|
|
|
|
|
|
|
|
|
Additions to deferred revenue / expense for the
three months ended September 30, 2007 |
|
|
120,810 |
|
|
|
19,770 |
|
|
|
|
|
|
|
|
|
|
Recognition of revenue due to retail sell-through in
the three months ended September 30, 2007 |
|
|
(142,770 |
) |
|
|
(23,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue and expense as of September 30, 2007 |
|
$ |
796,290 |
|
|
$ |
114,253 |
|
|
|
|
|
|
|
|
|
|
Additions to deferred revenue / expense for the
three months ended December 31, 2007 |
|
|
154,260 |
|
|
|
25,510 |
|
|
|
|
|
|
|
|
|
|
Reduction of deferred revenue from product return |
|
|
(303,300 |
) |
|
|
(45,899 |
) |
|
|
|
|
|
|
|
|
|
Recognition of revenue due to retail sell-through in
the three months ended December 31, 2007 |
|
|
(139,800 |
) |
|
|
(22,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue / expenses as of December 31, 2007 |
|
$ |
507,450 |
|
|
$ |
71,025 |
|
|
|
|
Accounts Receivable
The Companys accounts receivable primarily 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 December 31, 2007. Based on the current aging
of accounts receivable, the Company believes that it is not necessary to maintain an allowance for
doubtful accounts.
For credit card sales to direct sales customers, the Company verifies the customers credit
card prior to shipment of product. Payment not yet received from credit card sales is treated as a
receivable on the accompanying balance sheet. Based on the Companys verification process and
historical information available, management does not believe that there is justification for an
allowance for doubtful accounts on credit card sales as of December 31, 2007. For direct sales,
there is no bad debt expense for the three month period ended December 31, 2007.
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 the Companys product. The contract with the product manufacturer can be
terminated by either party with 90 days prior written notice. As of December 31, 2007 and June 30,
2007, inventory consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
June 30, 2007 |
Finished goods |
|
$ |
16,106 |
|
|
$ |
10,947 |
|
Packaging supplies |
|
|
18,837 |
|
|
|
16,887 |
|
|
|
|
Total inventory |
|
$ |
34,943 |
|
|
$ |
27,834 |
|
|
|
|
|
|
9
Earnings per share
Basic loss per share is computed by dividing the net income or loss by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share are
computed by dividing net income by the weighted average common shares and potentially dilutive
common share equivalents. The effects of approximately 30.5 million potential common share
equivalents issuable pursuant to convertible debentures and warrants issued in the Companys
private placement offerings, compensation based warrants issued by the Company and the Companys
2007 Long-Term Incentive Plan are not included in computations when their effect is antidilutive.
Because of the net loss for the three and six month periods ended December 31, 2007 and 2006, the
basic and diluted average outstanding shares are the same, since including the additional potential
common share equivalents would have an antidilutive effect on the loss per share calculation.
Goodwill and Other Intangible Assets
The Company has adopted the provisions of Statement of Financial Accounting Standards (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.
When the Company purchased the remaining interest in the Companys subsidiary, LNC, on March
10, 2005, the primary purpose was to secure the Companys intellectual property, i.e. patents,
patent applications and know how. As a result, the $2,000,000 purchase price was allocated to
patent costs.
In addition to the $2,000,000 cost of acquiring the remaining interest in LNC, the subsequent
costs of applying for patents are also capitalized and, once the patent is granted, the costs are
amortized on a straight-line basis over the lesser of the patents economic or legal life.
Capitalized costs will be expensed if patents are not granted. The Company reviews the carrying
value of its patent costs periodically to determine whether the patents have continuing value and
such reviews could result in the conclusion that the recorded amounts have been impaired. One of
the Companys three U.S. Patent applications was granted on July 10, 2007 and the remaining patent
applications are pending. The Company began amortization of the granted patent during the three
months ended September 30, 2007.
As of December 31, 2007 and June 30, 2007, intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2007 |
|
2007 |
Patent costs |
|
$ |
2,230,745 |
|
|
$ |
2,203,659 |
|
Trademark costs |
|
|
113,768 |
|
|
|
107,451 |
|
Amortization of patents & trademarks |
|
|
(49,404 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
2,295,109 |
|
|
$ |
2,311,110 |
|
|
|
|
|
|
Stock-Based Compensation
The Company adopted the modified prospective application of SFAS 123(R), Share-Based
Payment, for all options and warrants issued to employees and directors during the first quarter
ended September 30, 2006.
10
In an effort to advance the interests of the Company and its shareholders, the Company adopted
and the shareholders approved the Companys 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. A maximum of 6,000,000 shares of the
Companys common stock can be issued under the Plan in connection with the grant of awards. Awards
to purchase 4,649,321 shares have been granted pursuant to the Plan to various employees, officers,
directors and Scientific Advisory Board (SAB) members at prices between $0.19 and $3.47 per
share, vesting over one to three-year periods. Awards expire in accordance with the terms of
each award and the shares subject to the award are added back to the Plan upon expiration of the
award. Awards outstanding as of December 31, 2007, net of expirations, totals awards to purchase
1,437,935 shares of the Companys common stock.
Options granted prior to the adoption of the Plan were 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 (EITF)
Issue 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.
Compensation expense was calculated using the fair value method during the three and six month
periods ended December 31, 2007 and 2006 using the Black-Scholes option pricing model. The
following assumptions were used for options and warrants granted during the three and six month
periods ended December 31, 2007:
|
1. |
|
risk-free interest rate of between 3.84 and 4.26 percent in the three and
six month period ended December 31, 2007, respectively; |
|
|
2. |
|
dividend yield of -0- percent; |
|
|
3. |
|
expected life of 2 - 6 years in fiscal 2007; and |
|
|
4. |
|
a volatility factor of the expected market price of the Companys common stock
of 74 percent for the three and six month periods ended December 31, 2007. |
Because of the limited historical trading period of our common stock, the expected volatility
of our common stock was estimated at 74 percent, based on a review of the volatility of entities
considered by management as most comparable to our business.
Derivative financial instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.
We analyze convertible debentures under the guidance provided by EITF Issues 00-19 and 05-02
and review the appropriate classification under the provisions of SFAS 133 and EITF Issue 00-19.
We review the terms of convertible debt and equity instruments we issue to determine whether
there are embedded derivative instruments, including the embedded conversion option, that are
required
11
to be bifurcated and accounted for separately as derivative instrument liabilities. Also, in
connection with the sale of convertible debt and equity instruments, we may issue freestanding
options or warrants that may, depending on their terms, be accounted for as derivative instrument
liabilities, rather than as equity. For option-based derivative financial instruments, we use the
Black-Scholes option pricing model to value the derivative instruments.
Certain instruments, including convertible debt and equity instruments and the freestanding
warrants issued in connection with those convertible instruments, may be subject to registration
rights agreements, which impose penalties for failure to register the underlying common stock by a
defined date. These potential penalties are accounted for in accordance with SFAS No. 5, Accounting
for Contingencies.
When the embedded conversion option in a convertible debt instrument is not required to be
bifurcated and accounted for separately as a derivative instrument, we review the terms of the
instrument to determine whether it is necessary to record a beneficial conversion feature, in
accordance with EITF Issues 98-05 and 00-27. When the effective conversion rate of the instrument
at the time it is issued is less than the fair value of the common stock into which it is
convertible, we recognize a beneficial conversion feature, which is credited to equity and reduces
the initial carrying value of the instrument.
When convertible debt is initially recorded at less than its face value as a result of
allocating some or all of the proceeds received in accordance with Accounting Principles Board
(APB) Opinion No. 14, to derivative instrument liabilities, to a beneficial conversion feature or
to other instruments, the discount from the face amount, together with the stated interest on the
convertible debt, is amortized over the life of the instrument through periodic charges to income,
using the effective interest method.
Reclassification
Certain prior period amounts have been reclassified to comply with current period
presentation.
Effect of New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair
Value Measurements, which establishes a fair value hierarchy to measure assets and liabilities, and
expands disclosures about Fair
Value Measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. This statement is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the potential impact,
if any, of the adoption of SFAS 157 on the Companys financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill
acquired, and a establishes that acquisition costs will be generally expensed as incurred. This
statement also establishes disclosure requirements which will enable users to evaluate the nature
and financial effects of the business combination. SFAS 141R is effective as of the beginning of an
entitys fiscal year that begins after December 15, 2008, which will be the Companys year
beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on the Companys financial statements.
12
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementamendments of ARB No. 51 (SFAS 160). SFAS 160 states that accounting and
reporting for minority interests will be recharacterized as noncontrolling interests and classified
as a component of equity. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. This statement is effective as of the beginning of an
entitys first fiscal year beginning after December 15, 2008, which corresponds to the Companys
fiscal year beginning July 1, 2009. The Company is currently evaluating the potential impact, if
any, of the adoption of SFAS 160 on the Companys financial statements.
Note 3 Accounting for Intellectual Property
Long-lived assets of the Company are reviewed annually as to whether their carrying value has
become impaired, pursuant to guidance established in SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. The Company assesses impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. When
an assessment for impairment of long-lived assets, long-lived assets to be disposed of, and certain
identifiable intangibles related to those assets is performed, the Company is required to compare
the net carrying value of long-lived assets on the lowest level at which cash flows can be
determined on a consistent basis to the related estimates of future undiscounted net cash flows for
such properties. If the net carrying value exceeds the net cash flows, then impairment is
recognized to reduce the carrying value to the estimated fair value, generally equal to the future
discounted net cash flow.
The recurring losses experienced by the Company have resulted in managements assessment of
impairment with respect to the capitalized patent costs. Analysis generated for this assessment
concluded that sales volumes, less the cost of manufacturing the product sold and less the
marketing and sales cost of generating the revenues, support managements conclusion that no
impairment to the capitalized patent costs has occurred.
Note 4 Convertible Debentures
On September 26 and October 31, 2007, the Company issued convertible debentures in a private
placement offering. The convertible debentures are convertible into the Companys common stock at
$0.20 per share during their term and at maturity, at the Companys option, may be repaid in full
or converted into common stock at the lower $0.20 per share or the average trading price for the 10
days immediately prior to the maturity date.
The Convertible Debentures bear interest at 8% per annum and have a term of three years.
Gross proceeds of $1,490,000, were distributed to the Company pursuant to the issuance of
convertible debentures in the private placement offering. The Company also issued warrants to
purchase shares of the Companys common stock at $.30 per share in the private placement offering.
Prior to conversion or repayment of the convertible debentures, if (i) the Company fails to
remain subject to the reporting requirements under the Exchange Act for a period of at least 45
consecutive days, (ii) the Company fails to materially comply with the reporting requirements under
the Exchange Act for a period of 45 consecutive days, (iii) the Companys common stock is no longer
quoted on the Over the Counter Bulletin Board or listed or quoted on a securities exchange, or (iv)
a
13
Change of Control (as defined in the convertible debentures) is consummated, the Company will be
required upon the election of the holder to redeem the convertible debentures in an amount equal to
150 percent of the principal amount of the convertible debenture plus any accrued or unpaid
interest.
The Company determined that the convertible debentures did not satisfy the definition of a
conventional convertible instrument under the guidance provided in EITF Issues 00-19 and 05-02, as
an anti-dilution provision in the convertible debentures reduces the conversion price dollar for
dollar if the Company issues common stock with a price lower than the conversion price of the
convertible debentures. However, the Company has reviewed the requirements of EITF Issue 00-19 and
concluded that the embedded conversion option in the convertible debentures qualifies for equity
classification under EITF Issue 00-19, and thus, is not required to be bifurcated from the host
contract. The Company also determined that the warrants issued in the private placement offering
qualify for equity classification under the provisions of SFAS 133 and EITF Issue 00-19.
In addition, the Company has reviewed the terms of the convertible debentures to determine
whether there are any other embedded derivative instruments that may be required to be bifurcated
and accounted for separately as derivative instrument liabilities. Certain events of default
associated with the convertible debentures, including the holders right to demand redemption in
certain circumstances, have risks and rewards that are not clearly and closely associated with the
risks and rewards of the debt instruments in which they are embedded. We have reviewed these
embedded derivative instruments to determine whether they should be separated from the convertible
debentures. However, at this time, we do not believe that the value of these derivative instrument
liabilities is material.
In accordance with the provisions of APB Opinion No. 14, the Company allocated the proceeds
received in this transaction to the convertible debentures and warrants to purchase common stock
based on their relative estimated fair values. In accordance with EITF Issues 98-5 and 00-27,
management determined that the convertible debentures contained a beneficial conversion feature
based on the effective conversion price after allocating proceeds of the convertible debentures to
the common stock purchase warrants. As a result, the Company allocated $174,255 to the convertible
debentures, $578,185 to the common stock warrants, which was recorded in additional
paid-in-capital, and $737,560 to the beneficial conversion feature. The discount from the face
amount of the convertible debentures represented by the value initially assigned to any associated
warrants and to any beneficial conversion feature is amortized over the period to the due date of
each convertible debenture, using the effective interest method.
Effective interest associated with the convertible debentures totaled $45,863 and $46,938 for
the three and six months ended December 31, 2007, respectively. Effective interest is accreted to
the balance of convertible debt until maturity. A total of $256,568 was paid for commissions and
expenses incurred in the private placement offering and is being amortized over the term of the
convertible debentures.
Note 5 Stockholders Equity
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 six months ended December 31, 2007, stock based
compensation of $76,705 and $146,915 respectively, was reflected as an increase to additional paid
in capital three and six months ended December 31, 2007. Of the $76,705 stock based compensation
for
14
the three months ended December 31, 2007, $47,637 was employee related and $29,068 was
non-employee related. For the six months ended December 31, 2007 stock based compensation of
$115,124 was employee related and $31,791 was non-employee related.
During the three and six month periods ended December 31, 2007, the Company granted warrants
and options to consultants for services rendered, under EITF Issue 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. A warrant to purchase 1,200,000 shares of the companys common stock was
granted to Bolder Venture Partners for management consulting services rendered to the Company
during the three and six month periods ended December 31, 2007.
Effective as of June 28, 2007, we offered to reprice warrants to purchase 6,001,866 shares of
our common stock issued to investors in 2005 pursuant to a private placement offering. These
warrants were originally exercisable at $2.00 and $2.50 per share by the warrant holder and were
repriced to be exercisable at $0.30 per share upon the execution of a warrant amendment by the
Company and the warrant holder. As of December 31, 2007, holders of warrants to purchase 3,004,524
shares of our common stock issued in the private placement offering executed a warrant amendment,
and warrants to purchase 3,004,524 shares of our common stock have been repriced to be exercisable
at $0.30 per share. As of December 31, 2007, warrants to purchase 35,000 shares of our common stock
have been exercised at $0.30 per share.
The Companys Articles of Incorporation authorize the issuance of preferred shares. However,
as of December 31, 2007, none have been issued nor have any rights or preferences been assigned to
the preferred shares by the Companys Board of Directors.
Item 2. Managements 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 this report, as well as the Financial Statements and related notes
in our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007 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 contained in such forward-looking statements.
Overview
This managements discussion and analysis discusses the financial condition and results of
operations of Lifevantage Corporation (the Company, LifeVantage, or we, us or our) and
its wholly-owned subsidiary, Lifeline Nutraceuticals Corporation (LNC).
At the present time, we sell only 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, the primary battlefields for oxidative stress.
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 for its ability to meet
15
these criteria. Low, safe doses of each component help prevent unwanted additional effects
that might be associated with one or another of the components, none of which have been 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
on ABCs Primetime, which led to a substantial increase in sales. Since June 2005, sales of
Protandim® have declined on a monthly basis as we have not been successful in developing
a marketing message that has resonated with the target audience and has had as significant an
impact as Primetime. Protandim® sales totaled $796,409 and $1,603,733 for the three and
six month periods ended December 31, 2007.
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 the efficacy 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. Through outsourcing, we hope to
achieve a more direct correlation between the costs we incur and our level of product sales, versus
the relatively high fixed costs of building our own infrastructure to accomplish these same tasks.
Outsourcing also helps 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.
Our expenditures have consisted primarily of marketing expenses, operating expenses, payroll
and professional fees, customer service, research and development and product manufacturing for the
marketing and sale of Protandim®.
We began a turn-around strategy in January 2007 to reduce our cash drain by cutting spending
and lowering the operational expenses to a more appropriate level. This effort has been successful
in slowing down the cash drain of the Company.
An additional part of this turnaround strategy has been to reduce the rapid and consistent
erosion of our direct sales, which has continued since our direct sales first began in the Fourth
Quarter of fiscal year ended June 30, 2005. Through several new promotions and new customer
service retention and recapture programs, we expect to reduce direct sales erosion experienced
during fiscal 2007.
We also began to focus on building the sales and re-establishing positive sales momentum. In
this regard, we have taken steps that we believe will help to increase sales including entering the
direct response TV market. In addition, we also are working on developing and improving investor
relations and in January 2008, we hired a new Chief Executive Officer with significant industry
experience.
16
Recent Developments
Hiring of Chief Executive Officer
The Company hired David Brown as its new President and Chief Executive Officer effective
January 10, 2008. Mr. Brown has vast nutraceutical experience and was most recently the Managing
Director and Co-Founder of Nutrition Business Advisors, a firm founded in 2003 to provide strategic
consulting services, capital raising and full-service business development focused on the $130
billion Global Nutrition Industry. Prior to co-founding Nutrition Business Advisors, Mr. Brown was
President and Chief Executive Officer of Metabolife International. From 1994 to 2000, Mr. Brown
served as the President of Natural Balance, Inc., a Colorado-based dietary supplement company. Mr.
Brown began his career as a corporate attorney, serving at the law firm of Ballard, Spahr, Andrews
& Ingersoll in 1994 and Kindel & Anderson from 1991 to 1994. Mr. Brown holds a Juris Doctorate from
Cornell University and a Bachelors of Arts from Brigham Young University.
In connection with his appointment as President and Chief Executive Officer, Mr. Brown entered
into an Employment Agreement with the Company effective January 10, 2008.
Changes in Certifying Accountant
The Company dismissed Gordon, Hughes & Banks, LLP as the Companys independent registered
public accounting firm effective as of January 30, 2008. The Company appointed Ehrhardt, Keefe,
Steiner & Hottman PC on January 30, 2008 as its independent registered public accounting firm
beginning for the three months ended December 31, 2007, for the fiscal year ending June 30, 2008.
The decision to change accountants was recommended and approved by the Companys Board of Directors
and its Audit Committee on January 30, 2008.
2007 Private Placement
On September 26 and October 31, 2007, the Company issued convertible debentures in a private
placement offering. The convertible debentures are convertible into the Companys common stock at
$0.20 per share during their term and at maturity, at the Companys option may be repaid in full or
converted into common stock at the lower $0.20 per share or the average trading price for the 10
days immediately prior to the maturity date. The Convertible Debentures bear interest at 8% per
annum, and have a term of three years. Gross proceeds of $1,490,000, were distributed to the
Company pursuant to the issuance of convertible debentures in the private placement offering. The
Company also issued warrants to purchase shares of the Companys common stock at $.30 per share in
the private placement offering.
We intend to use the proceeds from the offering for marketing, scientific research,
development and testing of Protandim® and for working capital.
Registration Statement
On December 17, 2007, the Company filed a registration statement on Form SB-2 for the resale
of shares of the Companys common stock underlying the convertible debentures and warrants issued
in the Companys private placement offering and for certain consulting services to the Company, by
the
17
holders of those convertible debentures and warrants. On January 11, 2008, the SEC requested
additional information with respect to the registration statement. The Company is in process of
responding to the SECs inquiry.
Interim Corporate Management Services
Effective September 28, 2007, the Company engaged Bolder Venture Partners (BVP) to provide
full-time on site operations management services with associate Gene Copeland acting as the
Companys Interim Chief Operating Officer. Under the consulting arrangement, BVP provides hands-on
development and implementation of effective Direct to Consumer marketing programs and assisted in
the search for and hiring of the Companys new Chief Executive Officer. BVP also provides the
Company complete access to its team of associates who have broad experience in the areas of direct
to consumer internet marketing, direct response marketing and multiple media consumer campaigns.
Re-Pricing of 2005 Private Placement Warrants
Effective as of June 28, 2007, we offered to reprice warrants to purchase 6,001,866 shares of
our common stock issued to investors in 2005 pursuant to a private placement offering. These
warrants were originally exercisable at $2.00 and $2.50 per share by the warrant holder and were
repriced to be exercisable at $0.30 per share upon the execution of a warrant amendment by the
Company and the warrant holder. As of December 31, 2007, holders of warrants to purchase 3,004,524
shares of our common stock issued in the private placement offering executed a warrant amendment,
and warrants to purchase 3,004,524 shares of our common stock have been repriced to be exercisable
at $0.30 per share. As of December 31, 2007, warrants to purchase 35,000 shares of our common stock
have been exercised at $0.30 per share.
Three and Six Months Ended December 31, 2007 Compared to Three and Six Months Ended December 31,
2006
Sales We generated revenues of approximately $796,400 during the three months ended
December 31, 2007 and approximately $1,137,000 during the same period of the prior fiscal year.
For the three month periods ended December 31, 2007 and 2006, cost of sales was approximately
$186,000 and $249,000 resulting in a gross profit of approximately $610,000 and $888,000,
respectively. We generated revenues of approximately $1,604,000 during the six months ended
December 31, 2007 and approximately $3,212,000 during the same period of the prior fiscal year.
For the six month periods ended December 31, 2007 and 2006, cost of sales was approximately
$363,000 and $625,000, resulting in a gross profit of approximately $1,240,000 and $2,588,000,
respectively. A nationally televised news program in June 2005 on ABCs Primetime, led to
substantial sales. However, we have not been successful in developing a marketing message that has
received results as significant as those received from the exposure received on Primetime, and
accordingly, sales and gross profit have declined in subsequent periods.
Gross Margin Our gross profit percentage for the three month periods ended December 31,
2007 and 2006 was 77% and 78%, respectively. Our gross profit percentage for the six month periods
ended December 31, 2007 and 2006 was 77% and 81%, respectively. The decrease in margin for the
three and six months ended December 31, 2007 is due to price incentives to obtain customers during
the period.
Operating Expenses Total operating expenses reported during the three month period ended
December 31, 2007 were approximately $955,000 as compared to operating expenses of approximately
$2,658,000 during the three month period ended December 31, 2006. Operating expenses decreased
approximately
18
$1,703,000, primarily due to reduction in staff and other cost containment measures
taken. Total operating expenses reported during the six month period ended December 31, 2007 were
approximately $1,885,000 as compared to operating expenses of approximately $5,193,000 during the
six month period ended December 31, 2006. Operating expenses decreased approximately $3,308,000 due to the cost
containment programs initiated beginning third quarter of fiscal year 2007.
Marketing and Customer Service Expenses Marketing and customer service expense decreased
from approximately $1,068,000 in the three months ended December 31, 2006 to approximately $389,000
in the three months ended December 31, 2007. Marketing and customer service expense also decreased
from approximately $2,101,000 in the six months ended December 31, 2006 to $663,000 in the six
months ended December 31, 2007. This decrease was due to cost containment programs and a more
targeted approach to marketing, advertising and public relations in the three and six months ended
December 31, 2007.
General and Administrative Expenses Our general and administrative expense decreased from
approximately $1,392,000 in the three months ended December 31, 2006 to approximately $479,000 in
the three months ended December 31, 2007. General and administrative expense also decreased from
approximately $2,800,000 in the six months ended December 31, 2006 to approximately $905,000 in the
six months ended December 31, 2007. The decrease resulted from the reduction in staff and
associated expenses including stock related expenditures. During the three months ended December
31, 2007, stock related compensation was approximately $76,700 compared to approximately $509,000
during the three months ended December 31, 2006. During the six months ended December 31, 2007,
stock related compensation was approximately $147,000 compared to approximately $1,033,000 during
the six months ended December 31, 2006.
Research and Development Our research and development expenditures decreased in the three
months ended December 31, 2007 to approximately $28,000 from approximately $73,000 for the three
months ended December 31, 2006. For the six months ended December 31, 2007, our research and
development expenditures increased to approximately $219,000 from approximately $138,000 as a
result of research, development, and documentation of the efficacy of Protandim®.
Depreciation and Amortization Expense Depreciation and amortization expense increased from
approximately $31,000 during the three months ended December 31, 2006 to approximately $59,000 in
the three months ended December 31, 2007. Depreciation and amortization expense increased from
approximately $60,000 during the six months ended December 31, 2006 to approximately $99,000 in the
six months ended December 31, 2007. The increase is due to the amortization of patents and
trademarks commencing during the fiscal year 2007 as a result of the July 10, 2007 patent grant.
Loss on Disposal of Assets The loss on disposal of assets is the result of a loss
recognized from the Companys complete disposition and replacement of its legacy e-commerce
shopping cart system during the three and six month periods ended December 31, 2006. No similar
loss was incurred during the three or six month periods ended December 31, 2007.
Net Other Income and Expense We recognized net other expense of approximately $57,000 in
the three months ended December 31, 2007 as compared to net other income of approximately $5,000 in
the three months ended December 31, 2006. During the six months ended December 31, 2007, the
Company recognized net other expense of approximately $55,000 as compared to net other income of
approximately $20,000 during the six months ended December 31, 2006. The increase in expense is
the result of interest expense related to the convertible debentures issued during the six month
period ended December 31, 2007.
Net Loss As a result of the revenues and expenses described above, the Companys net loss
was approximately $402,000 for the three month period ended December 31, 2007 compared to a net
loss of
19
approximately $1,765,000 for the three month period ended December 31, 2006. For the six
months ended December 31, 2007 and 2006, the Companys net loss was approximately $700,000 and
$2,585,000, respectively. The period over period reduction in loss was due to the expense savings
offset by a reduction in revenue.
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 allow us to continue
our planned marketing efforts and the manufacturing and sale of Protandim® through
December 31, 2008. However, even if we generate revenues at increasing levels, the revenues
generated may not be greater than our expenses incurred. Operating results will depend on several
factors, including the selling price of the product, the number of units of product sold, the cost
of manufacturing and distributing the product, the cost of marketing and advertising, and other
costs, including corporate overhead, which we may 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 December 31, 2007, our available cash and marketable securities were approximately
$1,617,000. This represents an increase of approximately $1,456,000 from the approximately
$161,000 in cash and cash equivalents as of June 30, 2007. During the six months ended December
31, 2007, our net cash provided by operating activities was approximately $105,000 as compared to
net cash used by operating activities of approximately $1,989,000 during the six months ended
December 31, 2006. The Companys cash provided by operating activities for the six months ended
December 31, 2007 is due primarily to the return of deposits held by third parties and stock based
compensation expense offset against the operating loss.
During the six months ended December 31, 2007, our net cash used by investing activities was
approximately $1,509,000 which was primarily due to the purchase of available-for-sale marketable
securities, compared to cash provided by investment activities of $1,105,000 for the six months
ended December 31, 2006, which was primarily due to the sale and redemption of available-for-sale
marketable securities.
Cash provided by financing activities during the six months ended December 31, 2007 was
approximately $1,384,000, compared to approximately $783,000 during the six months ended December
31, 2006. Cash provided from financing activities during the six month period ended December 31,
2007 was due to the private placement in September 2007 and October 2007.
At December 31, 2007, we had working capital (current assets minus current liabilities) of
approximately $1,113,000, compared to working capital of approximately $(46,000) at June 30, 2007.
The increase in working capital was due to the proceeds received from the sale of convertible
debentures in our 2007 private placement offering and the return of certain merchant credit card
deposits and a legal retainer during the six months ended December 31, 2007.
On September 26 and October 31, 2007 the Company issued convertible debentures in a private
placement offering, which resulted in net proceeds received by the Company of approximately
$1,328,000. Based on the cost reduction initiatives that we have undertaken to conserve our cash
resources and the net proceeds received by the Company on September 26, 2007 and October 31, 2007,
we currently anticipate that our cash resources will be sufficient to fund our anticipated working
capital and capital expenditure needs through at least December 31, 2008.
20
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 cash operating expenses accordingly. Cash generated from operations has been
insufficient to satisfy our long-term liquidity requirements, which led us to seek additional
financing. Additional financing may be dilutive to our existing shareholders. In an effort to
conserve our cash resources, we initiated reductions in personnel, consulting fees, advertising,
and other general and administrative expenses. These measures have reduced the scope of our
planned operations during the later part of fiscal 2007 and the first six months of fiscal 2008 by
reducing our 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.
We plan to use the proceeds received from the 2007 private placement offering to expand
marketing efforts, scientific studies, intellectual property protection and working capital in
effort to grow direct to consumer and retail revenue. However, our cash resources may 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 increase revenues as planned, we may be
required to further reduce the scope of our planned operations, which could harm our business,
financial condition and operating results.
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.
We offer a 30-day, money back unconditional guarantee to all customers. As of December 31,
2007, our December 2007 direct sales shipments of approximately $224,000 were subject to the money
back guarantee. We replace returned product damaged during shipment wholly at our cost, which
historically has been negligible. The Company also utilizes its return rate experience of 2% of
sales to estimate returns on its sales to distributors.
21
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 $143,000 on December 31, 2007,
compared with approximately $113,000 on June 30, 2007. 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. From time to time we maintain a reserve for inventory obsolescence and we base
this reserve on assumptions about current and future product demand, inventory whose shelf life has
expired and market conditions. 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
December 31, 2007 because our product and raw materials have a shelf life of at least three (3)
years based upon testing performed quarterly in an accelerated aging chamber at our manufactures
facility.
Revenue Recognition We ship the majority of our 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 direct sales orders placed by customers.
After 30 days, we do not refund customers for returned product. We have experienced monthly
returns on direct sales orders approximating less than 2% of sales. Sales revenue and estimated
returns are recorded when the merchandise is shipped by UPS and title and risk of loss passes to
the customer.
For retail customers, the Company analyzes its distributor contracts to determine the
appropriate accounting treatment for its recognition of revenue on a customer by customer basis.
Where the right of return exists beyond 30 days, revenue and the related cost of sales is deferred
until sufficient sell-through data is received to reasonably estimate the amount of future returns.
We entered into an agreement with GNC for the sale of Protandim® beginning in July
2005, pursuant to which GNC has the right to return any and all product shipped to GNC, 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 GNC 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 for the sale of
Protandim® throughout the CVS store network. Among the terms of the agreement, one-half
of the payment for all orders was withheld by CVS until certain sell-through parameters were met.
Since inception of the agreement, CVS has withheld approximately $358,000. The Company granted a
return authorization to CVS for the return of bottles of Protandim® until January 31, 2008. As of
December 31, 2007, no bottles were shipped from CVS to LifeVantage. However, it is anticipated
that a sufficient number of bottles will be returned to completely offset the Companys current
receivable from CVS.
Research and Development Costs We have expensed all of our payments related to
research and development activities.
22
Derivative Instruments In connection with the sale of debt or equity instruments, we
may sell options or warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as conversion options,
which in certain circumstances may be required to be bifurcated from the associated host instrument
and accounted for separately as a derivative instrument liability.
The identification of, and accounting for, derivative instruments is complex. For options,
warrants and any bifurcated conversion options that are accounted for as derivative instrument
liabilities, we determine the fair value of these instruments using the Black-Scholes option
pricing model. That model requires assumptions related to the remaining term of the instruments and
risk-free rates of return, our current common stock price and expected dividend yield, and the
expected volatility of our common stock price over the life of the instruments. Because of the
limited trading history for our common stock, we have estimated the future volatility of our common
stock price based on not only the history of our stock price but also the experience of other
entities considered comparable to us. The identification of, and accounting for, derivative
instruments and the assumptions used to value them can significantly affect our financial
statements.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which establishes a fair
value hierarchy to measure assets and liabilities, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to classify the source of the
information. This statement is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the potential impact, if any, of the adoption of SFAS 157 on the
Companys financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141R), which replaces FASB Statement No. 141. SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill
acquired, and a establishes that acquisition costs will be generally expensed as incurred. This
statement also establishes disclosure requirements which will enable users to evaluate the nature
and financial effects of the business combination. SFAS 141R is effective as of the beginning of an
entitys fiscal year that begins after December 15, 2008, which will be the Companys year
beginning January 1, 2009. The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on the Companys financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementamendments of ARB No. 51 (SFAS 160). SFAS 160 states that accounting and
reporting for minority interests will be recharacterized as noncontrolling interests and classified
as a component of equity. The SFAS 160 also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. This statement is effective as of the beginning of
an entitys first fiscal year beginning after December 15, 2008, which corresponds to the Companys
year beginning January 1, 2009. The Company is currently evaluating the potential impact, if any,
of the adoption of SFAS 160 on the Companys financial statements.
23
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 Companys reports is recorded, processed, summarized,
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to the Companys 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 Exchange Act), 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.
There have been no changes in our internal control over financial reporting that occurred
during our fiscal quarter ended December 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
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
2007 Private Placement
On September 26 and October 31, 2007, the Company issued convertible debentures in a private
placement offering. The convertible debentures are convertible into the Companys common stock at
$0.20 per share during their term and at maturity, at the Companys option may be repaid in full or
converted into common stock at the lower $0.20 per share or the average trading price for the 10
days immediately prior to the maturity date. The Convertible Debentures bear interest at 8% per
annum, and have a term of three years. Gross proceeds of $1,490,000, were distributed to the
Company pursuant to the issuance of convertible debentures in the private placement offering. The
Company also issued warrants to purchase shares of the Companys common stock at $.30 per share in
the private placement offering.
We intend to use the proceeds from the offering for marketing, scientific research,
development and testing of Protandim® and for working capital.
BVP Warrant
On November 13, 2007, the Company issued a warrant to purchase 1,200,000 shares of the
Companys common stock to BVP as consideration for management consulting services provided to the
Company by BVP pursuant to a consulting agreement effective September 28, 2007.
Item 3. Defaults Upon Senior Securities
None.
24
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2007 Annual Meeting of Shareholders was held on November 30, 2007. The following nominees
were elected to our Board of Directors to serve as directors until the next annual meeting of
shareholders and until their respective successors have been elected and qualified:
|
|
|
|
|
|
|
|
|
Nominee |
|
Votes in Favor |
|
Withheld |
|
Dr. James D. Crapo
|
|
|
13,974,657 |
|
|
|
2,095,155 |
|
Dr. Joe M. McCord
|
|
|
15,281,760 |
|
|
|
788,052 |
|
Jack R. Thompson
|
|
|
13,995,868 |
|
|
|
2,073,944 |
|
Our shareholders ratified the appointment of Gordon, Hughes & Banks, LLP, an independent
registered certified public accounting firm, as our independent auditor for the fiscal year ending
June 30, 2008:
|
|
|
|
|
|
|
Votes in Favor |
|
Opposed |
|
Abstained |
|
Broker Non-Votes |
15,838,078 |
|
195,245 |
|
36,489 |
|
0 |
Item 5. Other Information.
None.
Item 6. Exhibits
31.1 |
|
Certification of Principal 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 Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
32.2 |
|
Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LIFEVANTAGE CORPORATION
|
|
Date: February 14, 2008 |
/s/ David W. Brown
|
|
|
David W. Brown |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: February 14, 2008 |
/s/ Bradford K. Amman
|
|
|
Bradford K. Amman |
|
|
Director of Finance, Secretary and
Treasurer
(Principal Financial Officer) |
|
26
EXHIBIT INDEX
31.1 |
|
Certification of Principal 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 Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
27