e10vq
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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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, 2009
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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.) |
11545 W. Bernardo Court, Suite 301, San Diego, California 92127
(Address of principal executive offices)
(858) 312-8000
(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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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
February 9, 2010 was 57,002,412.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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 in this report include, without limitation: statements
regarding future products or product development; statements regarding future selling, including
our expectations regarding the success of our network marketing sales channel, general and
administrative costs and research and development spending; statements regarding our product
development strategy; statements regarding the legal complaint filed against the company; and
statements regarding future financial performance, results of operation, capital expenditures and
sufficiency of capital resources to fund our operating 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 may be 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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The deterioration of global economic conditions and the decline of consumer
confidence and spending; |
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The potential failure or unintended negative consequences of the
implementation of our network marketing sales channel; |
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Our 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 of the network
marketing and dietary supplement industries 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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Our ability to retain independent distributors or to hire new independent
distributors on an ongoing basis; |
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The potential for product liability claims against the Company; |
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Independent distributor activities that violate applicable laws or regulations
and the potential for resulting government or third party actions against the Company; |
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The potential for third party and governmental actions involving our network
marketing sales channel; |
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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; |
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Our ability to protect our intellectual property rights and the value of our
product; |
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Our ability to continue to innovate and provide products that are useful to
consumers; |
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The significant control that our management and significant shareholders
exercise over us; |
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The illiquidity of our common stock; |
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Our ability to access capital markets in light of the global credit crisis or
other adverse effects to our business and financial position; |
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Our ability to generate sufficient cash from operations, raise financing to
satisfy our liquidity requirements, or reduce cash outflows without harm to our business,
financial condition or operating results; 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-K for the year ended June 30, 2009. |
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.
3
LIFEVANTAGE CORPORATION
INDEX
4
PART I Financial Information
Item 1. Financial Statements
LIFEVANTAGE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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December 31, 2009 |
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June 30, 2009 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
281,679 |
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$ |
608,795 |
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Restricted cash |
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259,937 |
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Marketable securities, available for sale |
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460,000 |
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520,000 |
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Accounts receivable, net |
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227,273 |
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648,116 |
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Equity raise receivable |
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119,750 |
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Inventory |
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687,880 |
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740,014 |
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Deposits |
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27,178 |
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16,482 |
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Prepaid expenses |
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141,795 |
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72,738 |
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Total current assets |
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1,825,805 |
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2,985,832 |
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Long-term assets |
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Marketable securities, available for sale |
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115,000 |
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130,000 |
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Property and equipment, net |
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229,952 |
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274,741 |
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Intangible assets, net |
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2,096,130 |
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2,175,281 |
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Deferred debt offering costs, net |
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291,625 |
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83,023 |
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Deposits |
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34,613 |
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66,795 |
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TOTAL ASSETS |
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$ |
4,593,125 |
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$ |
5,715,672 |
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LIABILITIES AND STOCKHOLDERS DEFICIT |
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Current liabilities |
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Accounts payable |
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$ |
2,004,517 |
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$ |
2,029,290 |
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Accrued expenses |
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1,159,570 |
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822,024 |
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Escrow for equity offering |
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259,937 |
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Revolving line of credit and accrued interest |
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435,034 |
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581,444 |
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Short-term notes payable related party |
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756,635 |
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Short-term derivative liabilities |
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722,715 |
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Short-term convertible debt, net of discount |
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507,330 |
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Capital lease obligations, current portion |
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10,707 |
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41,490 |
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Total current liabilities |
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5,596,508 |
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3,734,185 |
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Long-term liabilities |
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Deferred rent |
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25,434 |
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23,677 |
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Long-term derivative liabilities |
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4,155,663 |
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8,429,710 |
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Long-term convertible debt, net of discount |
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45,107 |
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382,194 |
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Total liabilities |
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9,822,712 |
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12,569,766 |
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Commitments and contingencies |
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Stockholders deficit |
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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 $.001, 250,000,000 shares
authorized; 57,002,314 and 53,968,628 issued and
outstanding as of December 31, 2009 and June 30,
2009, respectively |
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57,002 |
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53,969 |
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Additional paid-in capital |
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19,582,057 |
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16,964,927 |
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Accumulated deficit |
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(23,403,341 |
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(23,872,990 |
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Cumulative effect of change in accounting principle |
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(1,461,528 |
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Currency translation adjustment |
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(3,777 |
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Total stockholders deficit |
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(5,229,587 |
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(6,854,094 |
) |
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TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
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$ |
4,593,125 |
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$ |
5,715,672 |
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The accompanying notes are an integral part of these condensed consolidated statements.
5
LIFEVANTAGE CORPORATION AND SUBSIDIARY
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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2009 |
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2008 |
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2009 |
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2008 |
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Sales, net |
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$ |
2,455,646 |
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$ |
578,457 |
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$ |
4,313,643 |
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$ |
1,851,959 |
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Cost of sales |
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411,824 |
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127,546 |
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724,798 |
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363,085 |
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Gross profit |
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2,043,822 |
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450,911 |
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$ |
3,588,845 |
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1,488,874 |
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Operating
expenses: |
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Sales and marketing |
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1,962,590 |
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322,065 |
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3,975,195 |
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806,869 |
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General and administrative |
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2,548,891 |
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496,831 |
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4,929,608 |
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1,010,826 |
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Research and development |
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118,522 |
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65,960 |
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225,414 |
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118,515 |
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Depreciation and amortization |
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93,475 |
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39,246 |
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146,773 |
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79,428 |
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Total operating expenses |
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4,723,478 |
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924,102 |
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9,276,990 |
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2,015,638 |
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Operating loss |
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(2,679,656 |
) |
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(473,191 |
) |
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(5,688,145 |
) |
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(526,764 |
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Other income and (expense): |
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Interest expense |
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(741,790 |
) |
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(92,823 |
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(895,490 |
) |
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(170,385 |
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Change in fair value of derivative
liabilities |
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2,740,783 |
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8,768,519 |
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Total other income/(expense) |
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1,998,993 |
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(92,823 |
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7,873,029 |
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(170,385 |
) |
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Net income/(loss) |
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(680,663 |
) |
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(566,014 |
) |
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2,184,884 |
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(697,149 |
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Net income/(loss) per share, basic |
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($0.01 |
) |
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($0.02 |
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$ |
0.04 |
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($0.03 |
) |
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Net income/(loss) per share, diluted |
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($0.01 |
) |
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($0.02 |
) |
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$ |
0.03 |
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($0.03 |
) |
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Weighted average shares, basic |
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56,988,549 |
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24,766,117 |
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56,896,535 |
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24,766,117 |
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Weighted average shares, diluted |
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56,988,549 |
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24,766,117 |
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68,643,382 |
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24,766,117 |
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The accompanying notes are an integral part of these condensed consolidated statements.
6
LIFEVANTAGE CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the six months ended December 31, |
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2009 |
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2008 |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
2,184,884 |
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$ |
(697,149 |
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Adjustments to reconcile net loss to net cash
(used) provided by operating activities: |
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Depreciation and amortization |
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146,774 |
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79,428 |
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Stock based compensation to employees |
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929,205 |
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150,797 |
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Stock based compensation to non-employees |
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724,325 |
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65,290 |
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Amortization of debt discount |
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741,045 |
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83,555 |
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Non-cash
interest expense from amortization of deferred offering costs |
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44,591 |
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43,074 |
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Consulting fees paid in equity |
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Change in fair value of derivative liabilities |
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(8,768,519 |
) |
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Changes in operating assets and liabilities: |
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Decrease in accounts receivable |
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420,843 |
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32,257 |
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Decrease in inventory |
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52,134 |
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28,189 |
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Decrease in deposit from manufacturer |
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12,777 |
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(Increase) decrease in prepaid expenses |
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(69,057 |
) |
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107,695 |
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Decrease in deposits and other assets |
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21,486 |
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89,487 |
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Increase (decrease) in accounts payable |
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(24,773 |
) |
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5,215 |
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Increase in accrued expenses |
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339,302 |
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7,168 |
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(Decrease) in deferred revenue |
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(510,765 |
) |
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Net Cash Used by Operating Activities |
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(3,257,760 |
) |
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(502,982 |
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Cash Flows from Investing Activities: |
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Redemption of marketable securities |
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75,000 |
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350,000 |
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Purchase of intangible assets |
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(22,834 |
) |
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(8,717 |
) |
Purchase of equipment |
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(18,463 |
) |
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Net Cash Provided by Investing Activities |
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52,166 |
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322,820 |
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Cash Flows from Financing Activities: |
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Net payments
on/proceeds from revolving line of credit and accrued interest |
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(146,410 |
) |
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83,465 |
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Borrowings on long-term obligations |
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756,635 |
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Issuance of convertible debt and warrants |
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1,377,143 |
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Receivable from equity raise |
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119,750 |
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Principal payments under capital lease obligation |
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(30,783 |
) |
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(846 |
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Issuance of common stock and warrants |
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904,256 |
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Exercise of options and warrants |
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32,378 |
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Private placement fees |
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(130,714 |
) |
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Net Cash Provided (Used) by Financing Activities |
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2,882,255 |
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|
82,619 |
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Foreign Currency Effect on Cash |
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(3,777 |
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Decrease in Cash and Cash Equivalents: |
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(327,116 |
) |
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(97,543 |
) |
Cash and Cash Equivalents beginning of period |
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|
608,795 |
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|
196,883 |
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Cash and Cash Equivalents end of period |
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$ |
281,679 |
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$ |
99,340 |
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Non Cash Investing and Financing Activities: |
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Warrants issued for private placement fees |
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$ |
122,508 |
|
|
$ |
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Debt converted into common stock |
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$ |
30,000 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid for interest expense |
|
$ |
46,204 |
|
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$ |
54,382 |
|
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.
7
LIFEVANTAGE CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008
(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, 2009 included in our annual report on Form 10-K.
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, 2009, and the results of operations for the three and six
month periods ended December 31, 2009 and 2008 and the cash flows for the six month periods ended
December 31, 2009 and 2008. 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-Q, and do not contain certain information included in the Companys audited
financial statements and notes for the fiscal year ended June 30, 2009 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, 2009, and included in the Annual report on Form 10-K
on file with the SEC.
On August 5, 2009, the Company issued common stock in a private placement offering. The gross
proceeds received by the Company from the offering of approximately $904,000 are being used to
develop and expand its network marketing sales channel and to increase the Companys working
capital.
Effective September 15, 2009, the Company received a bridge loan in the amount of $100,000
from each of Mr. Thompson and Mr. Mauro, members of the Companys board of directors. The terms of
the notes were for one month with interest payable at a rate of 10% per annum. Accrued interest was
payable in cash by the Company upon repayment of the note at the maturity date. All parties agreed
to an extension of the term of these notes, until repayment of the principle and interest, which
occurred on February 4, 2010.
On September 24, 2009, the Company received an additional loan for $500,000 from a shareholder
with simple interest payable on the unpaid principle balance equal to 3% per calendar month through
March 24, 2010. On February 4, 2010, the accrued interest was paid and the principle
was converted into convertible debentures in a private placement offering.
On November 18, 2009, December 11, 2009 and December 31, 2009, the Company issued convertible
debentures in a private placement offering that bear interest at 8 percent per annum and have a
term of two years. The convertible debentures are convertible into the Companys common stock at
$0.20 per share during their term. The Company has the option to redeem the outstanding principal
plus accrued interest for cash at any time during the term of the notes. Net proceeds of
$1,246,428 were
8
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 $0.50 per share in the private placement offering.
The Company anticipates raising additional capital to continue to expand the network marketing
sales channel. However, there can be no assurance that any additional funds can be raised or that
revenue generated from this new sales channel will result in positive cash flow.
Note 2 Summary of Significant Accounting Policies:
Translation of Foreign Currency Statements
The Company translates the Foreign Currency statements for the three entities established in
Mexico (LifeVantage de México, S. de R.L. de C.V, Importadora LifeVantage, S. de R.L. de C.V., and
Servicios Administrativos para la Importación de Productos Body & Skin, S.C.) by using the current
exchange rate. For assets and liabilities, the exchange rate at the balance sheet date is used.
For revenue, expenses, gains, and losses, an appropriately weighted average exchange rate for the
period is used. For any investment in subsidiaries and retained earnings, the historical exchange
rate is used.
Consolidation
The accompanying financial statements include the accounts of the Company and its wholly-owned
subsidiaries Lifeline Nutraceuticals Corporation (LNC), LifeVantage de México, S. de R.L. de C.V.
(Limited Liability Company), Importadora LifeVantage, S. de R.L. de C.V. (Limited Liability
Company), and Servicios Administrativos para la Importación de Productos Body & Skin, S.C. All
inter-company accounts and transactions between the entities have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the
reporting of revenues, expenses, assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements. Actual results could differ from
those estimates.
Fair Value Measurements
Fair value measurement requirements are embodied in certain accounting standards applied in
the preparation of our financial statements. Significant fair value measurements include our common
stock and warrant financing arrangements and certain share-based payment arrangements. See Notes 4
and 7 Convertible Debentures and Common Stock and Warrant Offerings for disclosures related to
our common stock and warrant financing arrangements. The fair value hierarchy is defined below:
Fair value hierarchy:
9
|
(1) |
|
Level 1 inputs are quoted prices in active markets for identical assets and
liabilities, or derived therefrom. |
|
|
(2) |
|
Level 2 inputs are inputs other than quoted prices that are observable. |
|
|
(3) |
|
Level 3 inputs are unobservable inputs. |
The summary of fair values of financial instruments is as follows at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
Carrying |
|
|
|
|
|
Valuation |
Instrument: |
|
value |
|
Value |
|
Level |
|
Methodology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
marketable
securities |
|
$ |
460,000 |
|
|
$ |
460,000 |
|
|
|
2 |
|
|
Market price |
Long-term
marketable
securities |
|
$ |
115,000 |
|
|
$ |
115,000 |
|
|
|
2 |
|
|
Market price |
Derivative warrant
liabilities |
|
$ |
2,988,428 |
|
|
$ |
2,988,428 |
|
|
|
3 |
|
|
Black-Scholes |
Embedded conversion
liability |
|
$ |
1,889,950 |
|
|
$ |
1,889,950 |
|
|
|
3 |
|
|
Lattice model |
The summary of fair values of financial instruments is as follows at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair |
|
Carrying |
|
|
|
|
|
Valuation |
Instrument: |
|
value |
|
Value |
|
Level |
|
Methodology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
marketable
securities |
|
$ |
520,000 |
|
|
$ |
520,000 |
|
|
|
2 |
|
|
Market price |
Long-term
marketable
securities |
|
$ |
130,000 |
|
|
$ |
130,000 |
|
|
|
2 |
|
|
Market price |
Derivative warrant
liabilities |
|
$ |
8,429,710 |
|
|
$ |
8,429,710 |
|
|
|
3 |
|
|
Black-Scholes |
The following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) during the six months ended December 31, 2009 and the year ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
Beginning balance: Short-term derivative
financial instruments |
|
$ |
|
|
|
$ |
|
|
Total (gains) losses |
|
|
61,086 |
|
|
|
|
|
Purchases, sales, issuances and
settlements, net |
|
|
661,629 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
722,715 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
Beginning balance: Long-term derivative
financial instruments |
|
$ |
8,429,710 |
|
|
$ |
|
|
Total (gains) losses |
|
|
(8,829,605 |
) |
|
|
777,687 |
|
Purchases, sales, issuances and settlements,
net |
|
|
4,555,558 |
|
|
|
7,652,023 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
4,155,663 |
|
|
$ |
8,429,710 |
|
|
|
|
|
|
|
|
Revenue Recognition
The Company ships the majority of its products sold through the network marketing or
multi-level marketing sales channel 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
10
sales to customers and distributors 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 standard return policy is to
provide a 30-day money back guarantee on orders placed by customers. After 30 days, the Company
does not issue refunds to direct sales customers for returned product. In the network marketing
sales channel, the Company allows terminating distributors to return unopened unexpired product
that they have previously purchased up to twelve months prior to termination, subject to certain
consumption limitations. To date, returns from terminating distributors have been negligible and
the Company recognizes all such revenue. The Company has experienced overall monthly returns of
approximately 3% of sales. Our direct to consumer return rate, other than network marketing or multi-level marketing sales, and our retail
sales return rate is approximately 1% of sales based on historical experience and our network
marketing sales channel return rate is approximately 4% of sales based upon our network marketing
industry experience. As of December 31, 2009 and June 30, 2009, the Companys reserve balance for
returns and allowances was approximately $92,610 and $68,500, respectively.
For its sales to retailers, the Company analyzed individual contracts to determine the
appropriate accounting treatment for recognition of revenue on a customer by customer basis. As of
December 31, 2009, the Company ceased all shipments to retailers.
Accounts Receivable
The Companys accounts receivable primarily consists of its receivable from its retail
distributor. Management reviews accounts receivable on a regular basis to determine if any
receivables will potentially be uncollectible. The Company has one national retailer, GNC, as of
December 31, 2009. The Companys national retailer comprises approximately 75% of the Companys
customer accounts receivable balance as of December 31, 2009. Based on the current aging of its
accounts receivable, the Company believes that it is not necessary to maintain an allowance for
doubtful accounts.
For credit card sales to independent distributors and direct sales customers, the Company
verifies the customers credit card prior to shipment of product. Any payment not yet received
from credit card sales is treated as a receivable on the accompanying balance sheet. As of June
30, 2009 the Companys credit card processor put a hold on approximately $533,000 of credit card
sales due to higher sales volumes and perceived credit card risks from the Companys change to a
network marketing sales channel for distribution of its products. During the six months ended
December 31, 2009 the Company changed its credit card processor and received all of the reserve
deposit that had been held with the old processor. After changing to a new credit card processor
the Company is now required to maintain a 3% reserve on a rolling six month basis. The reserve
balance at December 31, 2009 was approximately $120,000.
Based on the Companys verification process for customer credit cards and historical
information available, management does not believe that there is justification for an allowance for
doubtful accounts on credit card sales related to its direct and independent distributor sales as
of December 31, 2009. For direct and independent distributor sales, there is no bad debt expense
for the three or six month periods ended December 31, 2009.
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
11
acquisition of raw materials and commencement of the manufacturing, bottling
and labeling of the Companys product. As of December 31, 2009 and June 30, 2009, inventory
consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
June 30, 2009 |
|
Finished goods |
|
$ |
446,519 |
|
|
$ |
522,599 |
|
Raw materials |
|
|
241,361 |
|
|
|
217,415 |
|
|
|
|
Total inventory |
|
$ |
687,880 |
|
|
$ |
740,014 |
|
|
|
|
|
|
|
|
Income/(Loss) per share
Basic income or 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 48.4 million common shares issuable
pursuant to the convertible debentures and warrants issued in the Companys private placement
offerings, compensation based warrants issued by the Company and options granted through 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 months ended December 31, 2009 and 2008, and
the six months ended December 31, 2008 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. As the Company reported net income for the six months
ended December 31, 2009, earnings per share is computed using the weighted average common shares
and potentially dilutive common share equivalents.
Research and Development Costs
The Company expenses all costs related to research and development activities as incurred.
Research and development expenses for the six month periods ended December 31, 2009 and 2008 were
$225,414 and $118,515 respectively.
Cash and Cash Equivalents
The Company considers only its monetary liquid assets with original maturities of three months
or less as cash and cash equivalents.
Marketable Securities
The Company has, from time to time, invested in marketable securities, including auction rate
preferred securities of closed-end funds (ARPS) to maximize interest income. The Company has
classified its investment in these instruments as marketable securities available for sale.
These marketable securities which historically have been liquid have been adversely affected
by the broader national liquidity crisis. During the six months ended December 31, 2009, $75,000
of the
12
Companys ARPS were redeemed by the underlying fund. The Company entered into an agreement
with its investment advisor, Stifel Nicolaus, to repurchase 100% of the remaining ARPS at par on or
prior to June 30, 2012. The schedule for repurchase of remaining ARPS by Stifel Nicolaus over the
next three years is as follows:
(a) The greater of 10 percent or $25,000 to be completed by June 30, 2010;
(b) The greater of 10 percent or $25,000 to be completed by June 30, 2011;
(c) The balance of outstanding ARPS, if any, to be repurchased by June 30, 2012.
The Company established a line of credit to borrow against marketable securities so that sales
of these securities would not have to occur in order to fund operating needs of the Company. The
interest on amounts borrowed has been approximately the same as the interest being earned from the
underlying securities.
The Company has entered into an agreement to expand the borrowing base of the line of credit
with its investment advisor from 50% to 80% of the par value of the Companys marketable
securities.
Based upon the agreement to expand the line of credit to 80%, management has access to 80% of
its ARPS through borrowing in the current year. Accordingly, management classified 80% or $460,000
of the Companys marketable securities as short term. The remaining 20% or $115,000 of the
Companys marketable securities that may not be available in the current year is classified as
long-term.
As of December 31, 2009, in light of the plan for repurchase and the repurchases made during
the year, management has determined that there has not been a change in the fair value of the
securities owned. The Company has not recorded any impairment related to these investments, as
management does not believe that the underlying credit quality of the assets has been impacted by
the reduced liquidity of these investments. We consider the inputs to valuation of these
securities as level 2 inputs in the fair value hierarchy.
Investment in marketable securities are summarized as follows as of December 31, 2009 and
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
(Loss) |
|
|
Value |
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities current |
|
$ |
|
|
|
$ |
460,000 |
|
Available for sale securities long
term |
|
|
|
|
|
|
115,000 |
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
|
|
|
$ |
575,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale securities current |
|
$ |
|
|
|
$ |
520,000 |
|
Available for sale securities long
term |
|
|
|
|
|
|
130,000 |
|
|
|
|
|
|
|
|
Total marketable securities |
|
$ |
|
|
|
$ |
650,000 |
|
|
|
|
|
|
|
|
Shipping and Handling
13
Shipping and handling costs associated with inbound freight and freight out to customers,
including independent distributors, are included in cost of sales. Shipping and handling fees
charged to all customers are included in sales.
Intangible Assets
As of December 31, 2009 and June 30, 2009, intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
Patent costs |
|
$ |
2,269,157 |
|
|
$ |
2,255,696 |
|
Trademark costs |
|
|
142,084 |
|
|
|
132,712 |
|
Amortization of patents & trademarks |
|
|
(315,111 |
) |
|
|
(213,127 |
) |
|
|
|
Intangible assets, net |
|
$ |
2,096,130 |
|
|
$ |
2,175,281 |
|
|
|
|
|
|
|
|
Patents
The costs of applying for patents are capitalized and, once the patent is granted, 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 or it is determined that the patent
is impaired. 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 impairment of the
recorded amounts. As of December 31, 2009, three U.S. patents have been granted. Amortization of
these patents commenced upon the date of the grant and will continue over their remaining legal
lives.
Stock-Based Compensation
Payments in equity instruments for goods or services are accounted for by the fair value
method. The Company has estimated the forfeiture rate on options to be 20%.
The Company adopted and the shareholders approved the Companys 2007 Long-Term Incentive Plan
(the Plan), effective November 21, 2006, to provide incentives to certain eligible employees who
are expected to contribute significantly to the strategic and long-term performance objectives and
growth of the Company. A maximum of 10,000,000 shares of the Companys common stock can be issued
under the Plan in connection with the grant of awards. Awards to purchase common stock have been
granted pursuant to the Plan and are outstanding to various employees, officers, directors,
independent distributors and Scientific Advisory Board (SAB) members at prices between $0.11 and
$0.76 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. As of December 31, 2009, awards for the purchase of an aggregate of 8,833,230 shares
of the Companys common stock are outstanding.
In certain circumstances, the Company issued common stock for invoiced services and in other
similar situations to pay contractors and vendors. Payments in equity instruments to non-employees
for
14
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, 2009 and 2008 using the Black-Scholes option pricing model. Compensation
based options totaling 621,500 and 1,377,500 were granted during the three and six month periods
ended December 31, 2009, respectively. No compensation based options were granted during the three
and six month periods ended December 31, 2008. Warrants for the purchase of 240,000 and 520,000
shares were granted to consultants during the three and six month periods ended December 31, 2008,
respectively. No warrants were granted to consultants during the three and six month periods ended
December 31, 2009. The following assumptions were used for options and warrants granted during the
three and six month periods ended December 31, 2009 and 2008:
|
1. |
|
risk-free interest rates of between 2.01 and 3.52 percent for the three
and six months ended December 31, 2009 and 2.42 percent for the three and six months
ended December 31, 2008; |
|
|
2. |
|
dividend yield of -0- percent; |
|
|
3. |
|
expected life of 3 to 6 years; and |
|
|
4. |
|
a volatility factor of the expected market price of the Companys common
stock of 160 and 337 percent for the three and six months ended December 31, 2009 and 204
percent for the six months ended December 31, 2008. |
Derivative Financial Instruments
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks. However, we have entered into certain other financial instruments and contracts,
such as freestanding warrants and embedded conversion features on convertible debt instruments that
are not afforded equity classification. These instruments are required to be carried as derivative
liabilities, at fair value, in our consolidated financial statements.
Derivative financial instruments consist of financial instruments or other contracts that
contain a notional amount and one or more underlying variables (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement. Derivative
financial instruments may be free-standing or embedded in other financial instruments. Further,
derivative financial instruments are initially, and subsequently, measured at fair value and
recorded as liabilities or, in rare instances, assets.
We estimate fair values of derivative financial instruments using various techniques that are
considered to be consistent with the objective measurement of fair values. In selecting the
appropriate technique, we consider, among other factors, the nature of the instrument, the market
risks that it embodies and the expected means of settlement. For less complex derivative
instruments, such as freestanding warrants, we generally use the Black Scholes Merton option
valuation technique, adjusted for the effect of dilution, because it embodies all of the requisite
assumptions (including trading volatility, estimated terms, and risk free rates) necessary to fair
value these instruments. For embedded conversion features we generally use a lattice technique
because it contains all the requisite assumptions to value these features. Estimating fair values
of derivative financial instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the instrument with related
changes in internal and external market factors. In addition, option-based techniques are highly
volatile and sensitive to changes in the trading market price of our common stock. Since derivative
financial instruments are initially and subsequently carried at fair values, our income will
reflect the volatility in changes to these estimates and assumptions.
15
The following table summarizes the effects on our income (expense) associated with
changes in the fair values of our derivative financial instruments for the three and six months
ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
December 31, 2009 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Investor warrants issued March 16, 2009 |
|
$ |
431,308 |
|
|
$ |
1,418,053 |
|
Investor warrants issued March 26, 2009 |
|
|
1,002,518 |
|
|
|
3,296,763 |
|
Investor warrants issued April 6, 2009 |
|
|
492,557 |
|
|
|
1,506,315 |
|
Investor warrants issued November 18, 2009 |
|
|
(39,754 |
) |
|
|
(39,754 |
) |
Investor warrants issued December 11, 2009 |
|
|
(139,172 |
) |
|
|
(139,172 |
) |
Investor warrants issued December 31, 2009 |
|
|
(32,249 |
) |
|
|
(32,249 |
) |
Embedded conversion derivative related to
2007 debentures |
|
|
811,550 |
|
|
|
2,544,538 |
|
Embedded conversion derivative related to
2009 debentures |
|
|
214,025 |
|
|
|
214,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in fair value of derivative
liability |
|
$ |
2,740,783 |
|
|
$ |
8,768,519 |
|
|
|
|
|
|
|
|
There were no derivative financial instruments outstanding and no changes to fair value of
derivative liability for the three and six month periods ended December 31, 2008.
Our derivative liabilities are significant to our financial statements for the three and six
month periods ended December 31, 2009. The magnitude of derivative income (expense) reflects the
following:
|
|
|
The market price of our common stock, which significantly affects the fair value of our
derivative financial instruments, experienced material price fluctuations. To illustrate,
the closing price of our common stock decreased from $0.67 on June 30, 2009 to $0.38 on
September 30, 2009 and to $0.25 on December 31, 2009. The lower stock price had the effect
of significantly decreasing the fair value of our derivative liabilities and, accordingly,
we were required to adjust the derivatives to these lower values with a credit to
derivative income. |
Convertible Debt Instruments
We issued convertible debt in September and October 2007 and in November and December 2009.
We review the terms of convertible debt and equity instruments that we issue to determine whether
there are embedded derivative instruments, including the embedded conversion options that are
required to be bifurcated and accounted for separately as derivative instrument liabilities. Also,
in
16
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 . For embedded conversion
derivatives we use a lattice model to value the derivative.
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. 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 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.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using statutory tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities from a change in tax rates is recognized in income in the period that includes the
effective date of the change.
Concentration of Credit Risk
We disclose significant concentrations of credit risk regardless of the degree of such risk.
Financial instruments with significant credit risk include cash and marketable securities. At
December 31, 2009, the Company had approximately $264,000 cash accounts at one financial
institution, approximately $15,000 in a foreign bank for our subsidiary and approximately $3,100 in
an investment management account at another financial institution.
Effect of New Accounting Pronouncements
We have reviewed recently issued, but not yet effective, accounting pronouncements and do not
believe any such pronouncements will have a material impact on our financial statements.
Note 3 Accounting for Intellectual Property
Long-lived assets of the Company are reviewed at least annually as to whether their carrying
value has become impaired. The Company assesses impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount of a long-lived asset may not be
recoverable. When assessing impairment of long-lived assets, long-lived assets to be disposed of,
and certain identifiable intangibles related to those assets, the Company is required to compare
the net carrying
17
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
undiscounted net cash flow.
Note 4 Convertible Debentures
2007
On September 26, 2007 and October 31, 2007, the Company issued convertible debentures in a
private placement offering that bear interest at 8 percent per annum and have a term of three
years. 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 of $0.20 per share or the average trading price for the 10
days immediately prior to the maturity date on September 26, 2010 and October 31, 2010.
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 $0.30 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 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 conversion option in the convertible debentures did not
satisfy the definition of being indexed to its own stock, 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. Based on
authoritative guidance effective on July 1, 2009 the embedded conversion option in the convertible
debentures was a liability as of July 1, 2009. The Company has bifurcated the embedded conversion
option from the host contract and accounted for this feature as a separate derivative liability.
The cumulative effect of the change in accounting principle was recognized as a cumulative effect adjustment
of $1,461,528 to the opening balance of stockholders deficit.
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. The Company has reviewed
these embedded derivative instruments to determine whether they should be separated from the
convertible debentures. However, at this time, the Company has determined that the value of these
derivative instrument liabilities is not material.
18
The Company allocated the proceeds received in the private placement to the convertible
debentures and warrants to purchase common stock based on their relative estimated fair values.
Management determined that the convertible debentures contained an embedded derivative related to
the anti-dilution provision and price after allocating proceeds of the convertible debentures to
the common stock purchase warrants. As a result, the Company allocated $661,629 to the embedded
derivative which was recorded as a liability and $578,185 to the common stock warrants, which were
recorded in additional paid-in-capital. 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 $147,955 and $306,703
for the three and six month periods ended December 31, 2009, respectively. Effective interest
associated with the convertible debentures totaled $74,195 and $137,937 for the three and six month
periods ended December 31, 2008, respectively. Effective interest is accreted to the balance of
convertible debt until maturity. A total of $256,567 was paid for commissions and expenses
incurred in the 2007 private placement offering which is being amortized into interest expenses
over the term of the convertible debentures on a straight-line basis. As of December 31, 2009 the
Company has recorded accumulated amortization of 2007 deferred offering costs of $176,051.
2009
On November 18, 2009, December 11, 2009 and December 31, 2009, in a private placement
offering, the Company issued convertible debentures that bear interest at 8 percent per annum and
have a term of two years and 4,080,790 warrants to purchase shares of the Companys common stock
with an exercise price of $0.50 per share in exchange for aggregate net proceeds of $1,246,428. The
convertible debentures are convertible into the Companys common stock at $0.20 per share during
their term. Subject to meeting certain equity conditions, the Company has the option to redeem the
outstanding principal plus accrued interest for cash at any time during the term of the notes.
Prior to conversion or repayment of the convertible debentures, if (i) the Companys reporting
requirements under the Exchange Act are suspended or terminated, (ii) the Companys common stock is
no longer quoted on the Over the Counter Bulletin Board or listed or quoted on a securities
exchange, (iii) at any time during the period commencing from the six month anniversary of the date
the debenture was issued and ending at such time that all of the shares of common stock issuable
upon conversion of that debenture may be sold without the requirement for the Company to be in
compliance with Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule
144, if the Company shall fail for any reason to satisfy the current public information requirement
under Rule 144(c) or (iv) a change of control is consummated, the Company will be required upon the
election of the holder to redeem that holders convertible debenture in an amount equal to 130
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, 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, subject to specified exceptions.
Based on authoritative guidance effective on July 1, 2009 the Company has concluded that the
embedded conversion option in the convertible debentures is required to be bifurcated from the host
contract and accounted for this feature as a separate derivative liability, at fair value, in its
financial statements. In addition, the
19
Company has determined that the warrants issued in
conjunction with the convertible debentures are required to be carried as derivative liabilities,
at fair value, in its financial statements.
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. The Company has reviewed
these embedded derivative instruments to determine whether they should be separated from the
convertible debentures. However, at this time, the Company has determined that the value of these
derivative instrument liabilities is not material.
The Company allocated the proceeds received in the private placements to the embedded
derivative and warrants based on their estimated fair values. As a result, the Company recorded
$1,167,234 to the embedded derivative and $782,737 to the warrants, which were recorded as
liabilities. The discount from the face amount of the convertible debentures represented by the
value initially assigned to any associated warrants and embedded derivative is amortized over the
period from the date of issuance to the due date of each convertible debenture, using the effective
interest method. Discount exceeding the face value of the debt in the amount of $450,314 was
recorded to interest expense upon allocation.
Effective
interest associated with the convertible debentures totaled $45,107 for the three
and six month periods ended December 31, 2009. Effective interest is accreted to the balance of
convertible debt until maturity. The Company incurred an aggregate of $253,222 in commissions and
expenses in connection with the 2009 private placement offerings, $130,714 of which was paid in
cash and the balance of which was reflected in the issuance of warrants with a fair market value of
$122,508. The $253,222 in commissions and expenses is being amortized into interest expenses over
the term of the convertible debentures on a straight-line basis. As of December 31, 2009 the
Company has recorded accumulated amortization of 2009 deferred offering costs of $11,523.
In connection with the private placement offerings, the Company issued warrants to purchase
shares of the Companys common stock. These warrants are exercisable for a period of five years
from the date of issuance at an exercise price of $0.50 per share. The Company determined that the
warrants should be accounted for as a derivative liability, at fair value, in its financial
statements. The following is a table of the placement agent warrants issued and their fair value on
the date of issuance:
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
|
|
|
|
|
indexed to the |
|
|
|
|
|
|
warrants |
|
|
Fair Value |
|
November 18, 2009 |
|
|
741,305 |
|
|
$ |
132,661 |
|
December 11, 2009 |
|
|
2,574,613 |
|
|
|
484,810 |
|
December 31, 2009 |
|
|
764,872 |
|
|
|
165,266 |
|
|
|
|
|
|
|
|
Totals |
|
|
4,080,790 |
|
|
$ |
782,737 |
|
|
|
|
|
|
|
|
The warrants were valued using the Black-Scholes Merton valuation technique, adjusted for the
effects of dilution using the following assumptions:
20
Significant assumptions (or
ranges):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 18, 2009 |
|
December 11, 2009 |
|
December 31, 2009 |
Trading market values (1) |
|
$ |
0.21 |
|
|
$ |
0.22 |
|
|
$ |
0.25 |
|
Term (years) (3) |
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
Volatility (1) |
|
|
146 |
% |
|
|
146 |
% |
|
|
145 |
% |
Risk-free rate (2) |
|
|
2.21 |
% |
|
|
2.26 |
% |
|
|
2.69 |
% |
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
Note 5 Line of Credit and Notes Payable
The Company established a line of credit to borrow against its marketable securities
and any cash received from redemption of its marketable securities. Under an agreement to extend
the line of credit from 50% to 80% of the face value of its marketable securities, as of December
31, 2009, the Company can borrow up to $460,000. The line is collateralized by the Companys
marketable securities. The interest rate charged through December 31, 2009, 3.00 percent, is 0.25
percentage points below the published Wall Street Journal Prime Rate, which was 3.25 percent as of
December 31, 2009. As of December 31, 2009, the Company has borrowed approximately $435,000
including accrued interest from the line.
Effective September 15, 2009, the Company received a bridge loan in the amount of $100,000
from each of Mr. Thompson and Mr. Mauro, members of the Companys board of directors. The terms of
the notes were for one month with interest payable at a rate of 10% per annum. Accrued interest was
payable in cash by the Company upon repayment of the note at the maturity date. All parties agreed
to an extension of the term of these notes. See Note 9 Subsequent Events for additional
information. On September 24, 2009, the Company received an additional loan for $500,000 from a
shareholder with simple interest payable on the unpaid principal balance equal to 3% per calendar
month through March 24, 2010. This loan would have been due in full on March 24, 2010. As of
December 31, 2009 accrued and unpaid interest on these loans is $56,635. On February 4, 2010, the
accrued interest was paid, and the principle was converted into convertible debentures in a private
placement offering.
Note 6 Stockholders Equity
During the six months ended December 31, 2009, the Company issued common stock and warrants in
a private offering, resulting in gross proceeds to the Company of approximately $904,000. The
Company sold an aggregate of 2,583,668 shares of common stock and warrants to purchase 516,724
shares of common stock to participants in the offering. These warrants are exercisable for a
period of three years from the date of issuance at an exercise price of $0.50 per share.
Payments in equity instruments for goods or services are accounted for under the guidance of
share based payments, which require use of the fair value method. For the three and six months
ended
21
December 31, 2009, stock based compensation of $851,281 and $1,653,530, respectively, was
reflected as an increase to additional paid in capital. Of the stock based compensation for the
three and six months ended December 31, 2009, $490,338 and $929,205 respectively, was employee
related and $360,943 and $724,325 respectively, was non-employee related. For the three and six
months ended December 31, 2008 stock based compensation of $90,064 and $216,087 respectively, was
reflected as an increase to additional paid in capital. Of the stock based compensation for the
three and six months ended December 31, 2008, $62,797 and $150,797 respectively, was employee
related and $27,267 and $65,290 respectively, was non-employee related.
Compensation based warrants for the purchase of 520,000 shares of the Companys common stock
were granted to consultants for services rendered during the six month period ended December 31,
2008. The value of these warrants was estimated at $74,383, and was expensed over the service
period. No compensation based warrants were granted during the three or six month periods ended
December 31, 2009.
The Companys Articles of Incorporation authorize the issuance of preferred shares. However,
as of December 31, 2009, none have been issued nor have any rights or preferences been assigned to
the preferred shares by the Companys Board of Directors.
Note 7 Common Stock and Warrant Offerings
In March and April of 2009 the Company issued and sold to accredited investors an aggregate of
17,500,000 shares of common stock and warrants to purchase the same number of shares of common
stock. The offering occurred in three closings:
|
|
|
March 16, 2009: The issuance of 3,925,000 shares of common stock of the Company
at a purchase price of $0.20 per share and warrants exercisable for 3,925,000 shares of
common stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$785,000. Total cash fees for this offering were $78,500. |
|
|
|
|
March 26, 2009: The issuance of 9,115,000 shares of common stock of the Company
at a purchase price of $0.20 per share and warrants exercisable for 9,115,000 shares of
common stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$1,823,000. Total cash fees for this offering were $182,300. |
|
|
|
|
April 6, 2009: The issuance of 4,460,000 shares of common stock of the Company
at a purchase price of $0.20 per share and warrants exercisable for 4,460,000 shares of
common stock with an exercise price of $0.50 per share. Gross proceeds received amounted to
$892,000. Total cash fees for this offering were $39,200. |
Note 8 Contingencies and Litigation
On February 27, 2009, Zrii, LLC (Zrii) filed a complaint against the Company and two former
Zrii independent contractors in the United States District Court for the Southern District of
California.
The Companys Lawsuit with Zrii, LLC was completely and permanently settled on December 18, 2009.
On that day, the Company and Zrii, LLC executed a Settlement Agreement which, among other things,
(1) released all claims which each party, including associated individuals, of each, had against
one
22
another (2) provided for the dismissal with prejudice of the Lawsuit and (3) called for the
payment of $400,000 by the Company to Zrii, LLC. That payment was timely made on December 18,
2009. The Stipulation of Dismissal of the Lawsuit was filed with the Court on December 18, 2009.
The Order of Dismissal with Prejudice was entered on December 21, 2009.
Note 9 Subsequent Events
Two bridge loans in the amount of $100,000 from each of Mr. Thompson and Mr. Mauro, members of
the Companys board of directors and related parties of the Company, were repaid on February 4,
2010. The terms of the notes were for one month with interest payable at a rate of 10% per annum.
Accrued interest was payable in cash by the Company upon repayment of the note at the maturity
date. All parties agreed to an extension of the term of these notes, until repayment of the
principle and interest, which occurred on February 4, 2010. On September 24, 2009, the
Company received an additional loan for $500,000 from a shareholder with simple interest payable on
the unpaid principle balance equal to 3% per calendar month through March 24, 2010. On February 4,
2010, the accrued interest was paid, and the principle was converted into convertible debentures in
a private placement offering.
On November 30, 2009 the Companys board of directors approved a grant of 1,160,000 shares of
restricted stock to distributors in lieu of cash payments owed. The shares will be issued in the
third fiscal quarter of 2010.
On January 20 and February 4, 2010, in a private placement offering, the Company issued
convertible debentures in the aggregate principal amount of $3,104,892 that bear interest at 8
percent per annum and have a term of two years and warrants to purchase an aggregate of 7,770,000
shares of the Companys common stock with an exercise price of $0.50 per share. Net proceeds of
from these issuances was $2,839,700. The convertible debentures are convertible into the Companys
common stock at $0.20 per share during their term. Subject to meeting certain equity conditions,
the Company has the option to redeem the outstanding principal plus accrued interest for cash at
any time during the term of the notes.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements within the meaning of the
federal securities laws. We urge you to carefully review our description and examples of
forward-looking statements included in the section entitled Cautionary Note Regarding
Forward-Looking Statements at the beginning of this report. Forward-looking statements speak only
as of the date of this report and we undertake no obligation to publicly update any forward-looking
statements to reflect new information, events or circumstances after the date of this report.
Actual events or results may differ materially from such statements. In evaluating such statements,
we urge you to specifically consider various factors identified in this report, including the
matters set forth below in Part II, Item 1A of this report, any of which could cause actual results
to differ materially from those indicated by such forward-looking statements. The following
discussion and analysis should be read in conjunction with the accompanying financial statements
and related notes, as well as the Financial Statements and related notes in our Annual report on
Form 10-K for the fiscal year ended June 30, 2009 and the risk factors discussed therein.
23
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 subsidiaries Lifeline Nutraceuticals Corporation (LNC), LifeVantage de México,
S. de R.L. de C.V. (Limited Liability Company), Importadora LifeVantage, S. de R.L. de C.V.
(Limited Liability Company), and Servicios Administrativos para la Importación de Productos Body &
Skin, S.C.
We are a publicly traded dietary supplement company that markets and sells our products
through the network marketing or multi-level marketing industry and seeks to enhance life through
anti-aging and wellness products while creating business opportunities. We offer products backed
by science in two principal categories: dietary supplements that combat oxidative stress and
anti-aging skincare. We manufacture, market, distribute and sell two products, our centerpiece
product, Protandim®, a dietary supplement, and our Lifevantage TrueScience Anti-Aging
Cream. We primarily sell our products in the United States, and have recently started selling in
Mexico, through a network of independent distributors, preferred customers and direct customers.
We also sell our products through our direct to consumer sales channel.
Our revenue is primarily dependent upon the number and productivity of our independent
distributors. We have developed a distributor compensation plan and other incentives designed to
motivate our independent distributors to market and sell our products and to build sales
organizations. If we experience delays or difficulties in introducing compelling products or
attractive initiatives to independent distributors, this can have a negative impact on our revenue
and harm our business.
We will also leverage our resources to develop and introduce innovative products. Our
research efforts to date have been focused on investigating various aspects and consequences of the
imbalance of oxidants and antioxidants. 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 required to manage these operational
components successfully, and provides additional capacity without significant advance notice and at
competitive prices.
Our expenses have consisted primarily of commission and marketing expenses, payroll, legal and
professional fees, customer service, research and development and product manufacturing for the
marketing and sale of Protandim® and TrueScience Anti-Aging Cream.
In October 2008, we announced our launch into a network marketing sales channel. While we have
incurred significant costs by doing so, we believe this channel will continue to increase sales.
We believe that our products are well-suited for and will benefit from the network marketing sales
channel based upon the numerous scientific studies behind Protandim® which are best
communicated in a direct to consumer manner.
Net revenue from Protandim®, TrueScience® and related marketing
materials totaled approximately $2,456,000 and $4,314,000 for the three and six months ended
December 31, 2009,
24
respectively, and approximately $578,000 and $1,852,000 for the three and six
months ended December 31, 2008, respectively. During the six months ended December 31, 2008, the
Company recognized all deferred revenue and expenses from GNC and Vitamin Cottage (retail customers
at the time which had unlimited right of return requirements), as the Company determined it had
sufficient history to reasonably estimate returns and meet the retail revenue recognition
requirements. $511,000 of the
$1,852,000 of net revenue for the six months ended December 31, 2008 represented recognition
of prior period deferred revenue from GNC and Vitamin Cottage.
Recent Developments
November and December 2009 Debenture Offerings
On November 18, 2009, December 11, 2009 and December 31, 2009, in a private placement
offering, the Company issued convertible debentures that bear interest at 8 percent per annum, have
a term of two years, and warrants to purchase shares of the Companys common stock with an exercise
price of $0.50 per share in exchange for aggregate net proceeds of $1,246,428. The convertible
debentures are convertible into the Companys common stock at $0.20 per share during their term.
Subject to meeting certain equity conditions, the Company has the option to redeem the outstanding
principal plus accrued interest for cash at any time during the term of the notes.
Three and Six Months Ended December 31, 2009 Compared to Three and Six Months Ended December 31,
2008
Revenue We generated net revenue of approximately $2,456,000 during the three months
ended December 31, 2009, and generated net revenue of $578,000 during the three months ended
December 31, 2008. We generated net revenue of approximately $4,314,000 during the six months
ended December 31, 2009 and approximately $1,852,000 during the six months ended December 31, 2008.
The increase in revenue is due to increased sales volume through the network marketing or
multi-level marketing sales channel. During the three and six month periods ended December 31,
2009, most of our marketing effort was directed toward building this channel.
Gross Margin Our gross profit percentage for the three month periods ended December
31, 2009 and 2008 was 83% and 78%, respectively. Our gross profit percentage for the six months
ended December 31, 2009 and 2008 was 83% and 80%, respectively. The higher gross margin in 2009
was primarily due to efficiencies and cost reductions obtained through our contract manufacturer.
Operating Expenses Total operating expenses for the three months ended December 31,
2009 were approximately $4,723,000 as compared to operating expenses of approximately $924,000 for
the three months ended December 31, 2008. Total operating expenses during the six month period
ended December 31, 2009 were approximately $9,277,000 as compared to operating expenses of
approximately $2,016,000 during the six month period ended December 31, 2008. Operating expenses
consist of marketing and customer service expenses, general and administrative expenses, research
and
25
development, and depreciation and amortization expenses. Operating expenses increased
significantly due to additional personnel related costs for the Companys network marketing sales
channel strategy, commissions for distributors, and higher legal
expenses.
Sales and Marketing Expenses Sales and marketing expense increased from approximately
$322,000 in the three months ended December 31, 2008 to approximately $1,963,000 in the three
months ended December 31, 2009. Sales and marketing expenses increased from approximately
$807,000 in the six months ended December 31, 2008 to approximately $3,975,000 in the six
months ended December 31, 2009. This increase was due to additional sales and marketing personnel,
commissions paid to distributors, website and materials redevelopment and consulting fees.
General and Administrative Expenses Our general and administrative expense increased
from approximately $497,000 in the three months ended December 31, 2008 to approximately $2,549,000
in the three months ended December 31, 2009. General and administrative expense increased from
approximately $1,011,000 in the six months ended December 31, 2008 to $4,930,000 in the six months
ended December 31, 2009. The increase is primarily due to higher compensation expense for
additional personnel related to the rollout of our network marketing sales channel and higher legal
expenses during the three and six months ended December 31, 2009.
Research and Development Our research and development expenses increased from $66,000
in the three months ended December 31, 2008 to approximately $119,000 in the three months ended
December 31, 2009. Research and development expenses increased from $119,000 for the six months
ended December 31, 2008 to $225,000 in the six months ended December 31, 2009. These increases
were a result of an increase in fees paid to scientific advisory board members.
Depreciation and Amortization Expense Depreciation and amortization expense
increased from approximately $39,000 during the three months ended December 31, 2008 to
approximately $93,000 in the three months ended December 31, 2009. Depreciation and amortization
expense increased from approximately $79,000 for the six months ended December 31, 2008 to $147,000
for the six months ended December 31, 2009. These increases were due primarily to amortization of
trademarks and patents acquired.
Net Other Income and Expense We recognized net other income of approximately
$1,999,000 during the three months ended December 31, 2009 as compared to net other expense of
approximately $93,000 during the three months ended December 31, 2008. During the six months ended
December 31, 2009 we recognized other income of approximately $7,873,000 as compared to net other
expenses of approximately $170,000 for the six months ended December 31, 2008. This increase is
primarily the result of the change in fair value of the derivative warrant liability during the
three and six months ended December 31, 2009 of approximately
$2,741,000 and $8,769,000
respectively.
Net Income/Loss We recorded net loss of approximately $681,000 for the three month
period ended December 31, 2009 compared to a net loss of approximately $566,000 for the three month
period ended December 31 2008. We recorded net income of approximately $2,185,000 for the six
month period ended December 31, 2009 compared to a net loss for the six month period ended December
31, 2008 of approximately $697,000. Absent the effect of the change in fair value of the derivative
warrant liability, the Company would have incurred net losses of
approximately $3,421,000 and
$6,584,000 for the three and six months ended December 31, 2009, respectively.
26
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the Companys expansion
into the network marketing sales channel. This includes the cost of additional personnel, the
compensation plan to distributors, the manufacture and sale of our products, and general
and administrative expenses. In order to become cash flow positive, the Company must continue to
increase sales, further reduce expenses, or raise additional capital, and there is no guarantee
that any of these events will occur.
Our primary sources of liquidity are cash generated from the sales of our product and funds
raised from our 2007 and 2009 private placements and issuance of convertible debentures. As of
December 31, 2009, our available liquidity was approximately $282,000, including available cash,
cash equivalents and marketable securities. This represented a decrease of approximately $327,000
from the approximate $609,000 in cash, cash equivalents and marketable securities as of June 30,
2009. During the six months ended December 31, 2009, our net cash used by operating activities was
approximately $3,258,000 as compared to net cash used by operating activities of approximately
$503,000 during the six months ended December 31, 2008. The Companys cash used by operating
activities during the six month period ended December 31, 2009 increased primarily as a result of
increased operating expenditures as previously discussed.
During the six months ended December 31, 2009, our net cash provided by investing activities
was approximately $52,000, due to the redemption of marketable securities less the purchase of
intangible assets. During the six months ended December 31, 2008, our net cash provided by
investing activities was approximately $323,000 primarily due to the redemption of marketable
securities.
Cash provided by financing activities during the six months ended December 31, 2009 was
approximately $2,882,000 compared to cash provided by financing activities of approximately $83,000
during the six months ended December 31, 2008. Cash provided by financing activities during the
six month period ended December 31, 2009 was due primarily to proceeds from the August 2009 private
placement of approximately $904,000, loans from two directors and one shareholder totaling
approximately $757,000 and proceeds from the sale of convertible debentures in a private placement
financing for approximately $1,377,000. Cash provided from financing activities during the six
months ended December 31, 2008 was due to proceeds from the revolving line of credit.
We maintain an investment portfolio of marketable securities that is managed by a professional
financial institution. The portfolio includes ARPS (auction rate private securities) of AA and AAA
rated closed-end funds. These marketable securities which historically have been extremely liquid
have been adversely affected by the broader national liquidity crisis.
Based upon an agreement to expand the Companys line of credit to approximately 80% of the par
value of the Companys marketable securities which serve as collateral for the line, management has
classified 80% or $460,000 of the Companys marketable securities as short term. The remaining 20%
or $115,000 of the Companys marketable securities that may not be available in the current year is
classified as long-term. However, future economic events could change the portion of these
classified as long term.
At December 31, 2009, we had negative working capital (current assets minus current
liabilities) of approximately $3,771,000, compared to negative working capital of approximately
$748,000 at June 30, 2009. The decrease in working capital was primarily due to the rollout of our
network marketing
27
sales channel and accrued legal expenses related to the complaint filed against
the Company by Zrii, LLC, offset by the capital raised in August, November and December 2009.
In the third and fourth quarters of our 2009 fiscal year, we incurred substantial legal
expenses and overhead as we entered the network marketing sales channel. In the first and second
quarters of our 2010 fiscal year, we instituted a comprehensive review of job functions and
eliminated several positions. Our management reduced operating costs while striving to increase our
efficiency. We believe these initiatives have allowed us to retain the most qualified and
essential personnel required for continued operations and growth of our network marketing
distribution model.
Our ability to finance future operations will depend on our existing liquidity and,
ultimately, on our ability to generate additional revenues and profits from operations. Management
has projected that
existing cash on hand and the proceeds from the issuance of additional debentures in the third
quarter of fiscal 2010 will be sufficient to allow us to continue operations at current levels
through December 31, 2010. A shortfall from projected sales levels would likely result in expense
reductions, which could have a material adverse effect on our ability to continue operations at
current levels. We are seeking to complete our fundraising through debt, equity or equity-based
financing (such as convertible debt); however financing may not be available on favorable terms or
at all. If we raise additional funds by selling additional shares of our capital stock, or
securities convertible into shares of our capital stock, the ownership interest of our existing
shareholders may be diluted. The amount of dilution could be increased by the issuance of warrants
or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally
accepted in the United States of America. As such, we are required to make certain estimates,
judgments, and assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the periods
presented. Actual results could differ from these estimates. Our significant accounting policies
are described in Note 2 to our financial statements. Certain of these significant accounting
policies require us to make difficult, subjective, or complex judgments or estimates. We consider
an accounting estimate to be critical if (1) the accounting estimate requires us to make
assumptions about matters that were highly uncertain at the time the accounting estimate was made,
and (2) changes in the estimate that are reasonably likely to occur from period to period, or use
of different estimates that we reasonably could have used in the current period, would have a
material impact on our financial condition or results of operations.
There are other items within our financial statements that require estimation, but are not
deemed critical as defined above. Changes in estimates used in these and other items could have a
material impact on our financial statements. Management has discussed the development and
selection of these critical accounting estimates with our board of directors, and the audit
committee has reviewed the foregoing disclosure.
28
Allowances for Product Returns We record allowances for product returns at the time
we ship the product based on estimated return rates of 1% to 4%. 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.
We offer a 30-day, money back unconditional guarantee to all direct customers. As of December
31, 2009, our December 2009 direct and network marketing sales shipments of approximately $757,000
were subject to the money back guarantee. We replace product returned due to damage during
shipment wholly at our cost, the total of which historically has been negligible. In addition, we
allow terminating distributors to return 30% of unopened unexpired product that they have
previously purchased up to twelve months prior, subject to certain consumption limitations.
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 $93,000 on December 31, 2009,
compared with approximately $68,500 on June 30, 2009. 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. From time to time, 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, 2009 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.
Revenue Recognition We ship the majority of our product directly to the consumer
through the direct to consumer and network marketing sales channels via United Parcel Service,
(UPS), and receive substantially all payment for these shipments in the form of credit card
charges. We recognize revenue from direct product sales to customers upon passage of title and
risk of loss to customers when product ships from the fulfillment facility. Sales revenue and
estimated returns are recorded when product is shipped.
For retail customers, the Company analyzed 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 existed 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.
On December 31, 2009, the Company terminated its single retail distributor.
The Company recognized approximately $511,000 of previously deferred retail revenue and its
related costs during the six month period ended December 31, 2008, as it had sufficient information
to reasonably estimate future returns. Prior to July 2008, the Company recognized retail revenue
from its retail distributor on a sell-through basis as product was sold by that distributor to its
customer.
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.
29
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.
In January 2010 the Company discovered material errors related to the accounting for derivative instruments embedded in Convertible debentures issued in 2007 which resulted
in a restatement of the financials issued for the first quarter of fiscal 2010.
Intangible Assets Patent Costs We review the carrying value of our patent costs
and compare to fair value at least annually to determine whether the patents have continuing value.
In determining fair value, we consider undiscounted future cash flows and market capitalization.
Stock-Based Compensation We use the fair value approach to account for stock-based
compensation in accordance with the modified version of prospective application.
Research and Development Costs We have expensed all of our payments related to
research and development activities.
Recently Issued Accounting Standards
We have reviewed recently issued, but not yet effective, accounting pronouncements and do not
believe any such pronouncements will have a material impact on our financial statements.
Item 4T. Controls and Procedures
Disclosure Controls and Procedures
The SEC defines the term disclosure controls and procedures to mean a companys controls and
other procedures that are designed to ensure that information required to be disclosed in the
reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. The
Companys management 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 evaluated by the Companys management to allow management to make
timely decisions regarding required disclosure.
Members of the Companys management, including its Chief Executive Officer, David Brown, and
Chief Financial Officer, Carrie E. Carlander, have evaluated the effectiveness of the Companys
disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) or 15d-15(e), as of
December 31, 2009, the end of the period covered by this report. Based upon that evaluation, Mr.
Brown and Ms. Carlander concluded that our disclosure controls and procedures were effective as of
December 31, 2009.
30
Changes in Internal Control over Financial reporting
There were no changes in our internal control over financial reporting during the quarter
ended December 31, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting other than the engagement of outside experts,
as needed, to provide counsel and guidance in areas where the Company cannot economically maintain
the required expertise internally with respect to the application of certain accounting standards
that resulted in the Company restating its interim financial statements for the quarter ended
September 30, 2009. Further, with the addition of new employees for the entry and rollout of the
Companys network marketing sales strategy, internal controls are being analyzed and modified where
necessary for effectiveness.
31
PART II Other Information
Item 1. Legal Proceedings
On February 27, 2009, Zrii, LLC (Zrii) filed a complaint against the Company and two former
Zrii independent contractors in the United States District Court for the Southern District of
California.
The Companys Lawsuit with Zrii, LLC was completely and permanently settled on December 18, 2009.
On that day, the Company and Zrii, LLC executed a Settlement Agreement which, among other things,
(1) released all claims which each party, including associated individuals, of each, had against
one another (2) provided for the dismissal with prejudice of the Lawsuit and (3) called for the
payment of $400,000 by the Company to Zrii, LLC. That payment was timely made on December 18,
2009. The Stipulation of Dismissal of the Lawsuit was filed with the Court on December 18, 2009.
The Order of Dismissal with Prejudice was entered on December 21, 2009.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the risk factors discussed in Part I. Item 1ARisk Factors in our Annual report on Form 10-K for
the fiscal year ended June 30, 2009. The risks and uncertainties described in such risk factors and
elsewhere in this report have the potential to materially affect our business, financial condition,
results of operations, cash flows, projected results and future prospects. As of the date of this
report, we do not believe that there have been any material changes to the risk factors previously
disclosed in our Annual report on Form 10-K for the fiscal year ended June 30, 2009, other than as
set out below reflecting our recent entry on the network marketing or multi-level marketing sales
channel.
Deteriorating economic conditions globally, including the current financial crisis and declining
consumer confidence and spending could harm our business.
Global economic conditions have deteriorated significantly over the past several years.
Consumer confidence and spending have declined drastically and the global credit crisis has limited
access to capital for many companies. The economic downturn could adversely impact our business in
the future by causing a decline in demand for our products, particularly if the economic conditions
are prolonged or continue to worsen. In addition, such economic conditions may adversely impact
access to capital for us and our suppliers, may decrease our independent distributors ability to
obtain or maintain credit cards, and may otherwise adversely impact our operations and overall
financial condition.
Our recently initiated network marketing sales channel may not be successful.
We have recently initiated a network marketing sales channel through which independent
distributors will enter into agreements with us to sell Protandim® and other products
that we may introduce in the market. In order to implement our new sales channel, we hired
approximately 50 additional personnel and enrolled several thousand independent distributors in the
third and fourth quarters of our fiscal year 2009. Our additions of personnel and independent
distributors resulted in substantial additional costs and expenses, although in the first and
second quarters of our fiscal year
32
2010, we have eliminated many of these personnel. In order to meet these increased expense
requirements, we must continue to increase sales of our product which we may be unable to
accomplish. If our revenue does not increase correspondingly with these increased costs and
expenses, or if we do not further reduce our expenses from current levels, we will be unable to
meet the cost requirements of our network marketing sales channel. In addition, there is no
guarantee that our independent distributors efforts to sell Protandim® or other
products will be successful. Should some of the risks related to the Companys network marketing
distribution channel materialize, we have the option of changing the sales channel and continuing
the business.
If we are unable to retain our existing independent distributors and recruit additional independent
distributors, our revenue will not increase and may even decline.
We have recently initiated a network marketing sales channel and we depend on our independent
distributors to generate a significant portion of our revenue through that sales channel. Our
independent distributors may terminate their services at any time, and, like most network marketing
companies, we are likely to experience high turnover among independent distributors from year to
year. Independent distributors who join to purchase our products for personal consumption or for
short-term income goals may only stay with us for a short time. Independent distributors have
highly variable levels of training, skills and capabilities. As a result, in order to maintain
sales and increase sales in the future, we need to continue to retain independent distributors and
recruit additional independent distributors. To increase our revenue, we must increase the number
of and/or the productivity of our independent distributors. The number of our independent
distributors may not increase and could decline. While we take steps to help train, motivate, and
retain independent distributors, we cannot accurately predict how the number and productivity of
independent distributors may fluctuate because we rely primarily upon our independent distributor
leaders to recruit, train, and motivate new independent distributors. Our operating results could
be harmed if we and our independent distributor leaders do not generate sufficient interest in our
business to retain existing independent distributors and attract new independent distributors.
The number and productivity of our independent distributors also depends on several additional
factors, including:
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any adverse publicity regarding us, our products, our distribution channel, or our
competitors; |
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lack of interest in existing or new products; |
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lack of a story that generates interest for potential new independent distributors and
effectively draws them into the business; |
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the publics perception of our products and their ingredients; |
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the publics perception of our distributors and direct selling businesses in general; |
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our actions to enforce our policies and procedures; |
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any regulatory actions or charges against us or others in our industry; and |
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general economic and business conditions. |
Because we compete with other network marketing companies in attracting independent
distributors, our operating results could be adversely affected if our existing and new business
opportunities and incentives, products, business tools and other initiatives do not generate
sufficient enthusiasm and economic incentive to retain our existing independent distributors or to
recruit new independent distributors on a sustained basis. There can be no assurance that our
initiatives will continue to generate excitement among our independent distributors in the
long-term or that planned initiatives will be successful in maintaining independent distributor
activity and productivity or in motivating independent distributor leaders to remain engaged in
business building and developing new independent
33
distributor leaders. In addition, some initiatives
may have unanticipated negative impacts on our independent distributors, particularly any changes
to our compensation plan. The introduction of a new
product or key initiative can also negatively impact other product lines to the extent our
independent distributor leaders focus their efforts on the new product or initiative.
Although our independent distributors are independent contractors, improper independent distributor
actions that violate laws or regulations could harm our business.
Independent distributor activities in our existing markets that violate governmental laws or
regulations could result in governmental actions against us in markets where we operate, which
would harm our business. Our independent distributors are not employees and act independently of
us. We implement strict policies and procedures to ensure our independent distributors will comply
with legal requirements. However, given the size of our independent distributor force, we may
experience problems with independent distributors from time to time.
Government inquiries, investigations, and actions regarding our network marketing system could harm
our business.
The network marketing industry is subject to governmental regulation, including regulation by
the Federal Trade Commission (FTC). Any determination by the FTC or other governmental agency
that we or our distributors are not in compliance with existing laws or regulations regarding the
network marketing industry could potentially harm our business. Even if governmental actions do not
result in rulings or orders against us, they could create negative publicity that could
detrimentally affect our efforts to recruit or motivate independent distributors and attract
customers and, consequently, result in a material adverse effect on our business and results of
operations.
Challenges by private parties to the form of our network marketing system or other regulatory
compliance issues could harm our business.
We may be subject to challenges by private parties, including our independent distributors, to
the form of our network marketing system or elements of our network marketing sales channel. For
example, lawsuits have recently been brought or threatened against certain companies that include
allegations that the businesses involve unlawful pyramid schemes as well as other allegations.
Adverse rulings in any of the cases that have been filed or that may be filed in the future could
negatively impact our business if they create adverse publicity, modify current regulatory
requirements in a manner that is inconsistent with our current business practices, or impose fines
or other penalties. In the United States, the network marketing industry and regulatory authorities
have generally relied on the implementation of distributor rules and policies designed to promote
retail sales to protect consumers and to prevent inappropriate activities and to distinguish
between legitimate network marketing distribution plans and unlawful pyramid schemes. We have
adopted rules and policies based on case law, rulings of the FTC, discussions with regulatory
authorities in several states and domestic and global industry standards. Legal and regulatory
requirements concerning network marketing systems, however, involve a high level of subjectivity,
are inherently fact-based and are subject to judicial interpretation. As a result, we can provide
no assurance that we would not be harmed by the application or interpretation of statutes or
regulations governing network marketing, particularly in any civil challenge by a current or former
independent distributor.
Adverse publicity concerning our business, marketing plan, products or competitors could harm our
business and reputation.
34
The size of our distribution force and the results of our operations can be particularly
impacted by adverse publicity regarding us, the nature of our independent distributor network, our
products or the actions of our independent distributors. Specifically, we are susceptible to
adverse publicity concerning:
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suspicions about the legality and ethics of network marketing; |
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the ingredients or safety of our or our competitors products; |
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regulatory investigations of us, our competitors and our respective products; |
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the actions of our current or former distributors; and |
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public perceptions of network marketing generally. |
The loss of key distributors could negatively impact the growth of our network marketing sales
channel.
Our independent distributors, together with their networks of downline distributors, currently
account for substantially all of our sales through our network marketing sales channel. As a
result, the loss of a high-level independent distributor or a group of leading distributors in the
independent distributors network of downline distributors, whether by choice or through
disciplinary actions for violations of our policies and procedures, could negatively impact our
revenues and the growth of our network marketing sales channel.
Laws and regulations may prohibit or severely restrict our network marketing efforts and regulators
could adopt new regulations that harm our business.
Various government agencies throughout the world regulate network marketing practices. These
laws and regulations are generally intended to prevent fraudulent or deceptive schemes, often
referred to as pyramid schemes, which compensate participants for recruiting additional
participants irrespective of product sales, use high pressure recruiting methods and/or do not
involve legitimate products. Complying with these rules and regulations can be difficult and
requires the devotion of significant resources on our part. If we are unable to continue business
in existing markets or commence operations in new markets because of these laws, this could result
in a material adverse effect on our business and results of operations. Markets in which we
currently do business could change their laws or regulations to negatively affect or completely
prohibit network marketing efforts.
There is no assurance that we will be successful in expanding our operations and, if successful,
managing our future growth.
Our ability to finance future operations will depend on our existing liquidity and,
ultimately, on our ability to generate additional revenues and profits from operations. Management
has projected that existing cash on hand will be sufficient to allow us to continue operations at
current levels through December 31, 2010. A shortfall from projected sales levels would likely
result in expense reductions, which could have a material adverse effect on our ability to continue
operations at current levels. We are seeking to complete our fundraising through debt, equity or
equity-based financing (such as convertible debt); however financing may not be available on
favorable terms or at all. If we raise additional funds by selling additional shares of our
capital stock, or securities convertible into shares of our capital stock, the ownership interest
of our existing shareholders may be diluted. The amount of dilution could be increased by the
issuance of warrants or securities with other dilutive characteristics, such as anti-
35
dilution
clauses or price resets. If we are unable to raise additional financing in a timely manner, we
would be forced to liquidate some or all of our assets, and/or to suspend, curtail, or cease all or
certain of our operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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4.1
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Form of debenture issued in connection with November 2009 financing (1) |
4.2
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Form of warrant issued in connection with November 2009 financing (1) |
4.3
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Amendment to Debentures and Warrants, dated as of December 11, 2009 * |
4.4
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Form of restated debenture issued pursuant to amended and restated securities purchase
agreement dated as of December 11, 2009 * |
4.5
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Form of restated warrant issued pursuant to amended and restated securities purchase agreement
dated as of December 11, 2009 * |
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10.1
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Scientific Advisory Board Agreement effective as of October 1, 2009 by and between the
Registrant and Joe McCord, M.D. #* |
10.2
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Form of securities purchase agreement entered into in connection with November 2009 financing
(1) |
10.3
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Form of amended and restated securities purchase agreement originally dated as of December 11,
2009 * |
10.4
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First Amendment to Chief Executive Officer Employment Agreement dated December 15, 2009
between the Registrant and David W. Brown #* |
10.5
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Settlement Agreement dated December 18, 2009 by and between Zrii, LLC and William F. Farley,
on the one hand, and the Registrant, Wellness Acquisition Group, and the other parties there to, on the other hand.* |
10.6
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Amendment to and Acknowledgement of Cancellation of Promissory Note Agreement dated February
4, 2010 by and between the Registrant and C. Mike Lu * |
31.1
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Certification of Principal
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 * |
31.2
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Certification of Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * |
32.1
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Certification of Principal
Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 * |
32.2
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Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
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# |
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Indicates management contract, arrangement or compensatory plan |
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(1) |
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Incorporated by reference to the Registrants Form 8-K filed November 18, 2009 (SEC file number
000-30489-091177700) |
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* |
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Filed or furnished herewith |
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.
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LIFEVANTAGE CORPORATION
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Date: February 16, 2010 |
/s/ David W. Brown
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David W. Brown |
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President and Chief Executive Officer
(Principal Executive Officer) |
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Date: February 16, 2010 |
/s/ Carrie E. Carlander
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Carrie E. Carlander |
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Chief Financial Officer
(Principal Financial Officer) |
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37