We are a company focused on nutrigenomics, the study of how nutrition and naturally occurring compounds affect human genes to support good health. We are dedicated to helping people achieve their health, wellness and financial goals. We provide quality, scientifically-validated products to customers and independent distributors as well as a financially rewarding commission-based direct sales opportunity to our independent distributors. We engage in the identification, research, development, formulation and sale of advanced nutrigenomic activators, dietary supplements, nootropics, pre- and pro-biotics, weight management, skin and hair care, bath & body, and targeted relief products. We currently sell our products to customers and independent distributors in two geographic regions that we have classified as the
Americasregion and the Asia/Pacific& Europeregion. The success and growth of our business is primarily based on the effectiveness of our independent distributors to attract and retain customers in order to sell our products and our ability to attract and retain independent distributors. When we are successful in attracting and retaining independent distributors and customers, it is largely because of: •Our products, including our flagship Protandim® family of scientifically-validated dietary supplements, LifeVantage® Omega+™, ProBio™, IC Bright™, and Daily Wellness™ dietary supplements, our line of Nrf2 enhanced TrueScience® skin, hair, bath & body, and targeted relief products, Petandim®, our companion pet supplement formulated to combat oxidative stress in dogs, Axio®, our nootropic energy drink mixes, and PhysIQ™, our smart weight management system.;
•Our sales compensation plan and other sales initiatives and incentives; and
•Our delivery of superior customer service.
20 -------------------------------------------------------------------------------- As a result, it is vital to our success that we leverage our product development resources to develop and introduce compelling and innovative products and provide opportunities for our independent distributors to sell these products in a variety of markets. We sell our products in
the United States, Mexico, Japan, Australia, Hong Kong, Canada, Thailand, the United Kingdom, the Netherlands, Germany, Taiwan, Austria, Spain, Ireland, Belgium, New Zealand, Singapore, and the Philippines. In addition, we sell our products in a number of countries to customers for personal consumption only and in Chinathrough a Chinaapproved cross-border e-commerce business model. Entering a new market requires a considerable amount of time, resources and continued support. If we are unable to properly support an existing or new market, our revenue growth may be negatively impacted.
Impact of COVID-19 on Our Business
The pandemic caused by an outbreak of a new strain of coronavirus ("COVID-19") has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. Uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. As of the date of this filing, we have experienced moderate disruptions at the corporate level as we have transitioned our corporate workforce to a hybrid working environment, temporarily closed some of our showrooms and will call locations in international markets and cancelled multiple planned events in order to comply with group meeting restrictions. Our independent distributors have also experienced disruptions. Specifically, in
Japan, independent distributors are required to provide a hard-copy introductory packet (gaiyoshomen) in person to each person they approach to sponsor as an independent distributor before presenting our products and business opportunity. This requirement inhibits independent distributors from connecting with potential new independent distributors virtually or through social media. Accordingly, quarantines, avoidance of public places and general concerns about physical distancing related to COVID-19 or otherwise can significantly reduce the ability for independent distributors to meet people in person and commence the enrollment process. Elsewhere, our independent distributors have begun to adapt their approach for customer outreach and enrollment, including transitioning to a stronger social media presence, in an effort to sustain their sales volume. Our business may, in the future, experience additional disruptions and be negatively impacted by the COVID-19 pandemic, including as a result of limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell or any of the raw materials or components required in the production process, or to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; limitations on the ability of our independent distributors to conduct their businesses and purchase our products; and limitations on the ability of our independent distributors or customers to continue to purchase our products due to decreased disposable income. We have made modifications, and are evaluating additional potential modifications that may be needed, to protect our supply chain and preserve adequate liquidity to ensure that our business can continue to operate during this uncertain time. Some states have issued executive orders requiring all workers to remain at home, unless their work is critical, essential, or life-sustaining. Near the end of fiscal 2020 we transitioned all of our corporate employees to a work from home model and beginning July 2021we transitioned our workforce to a hybrid model whereby employees work certain days of the week in the office and other days have the option to work from home or in the office. To date, our employees are performing and adapting well with the evolving environment. With respect to liquidity, we are evaluating and taking actions to ensure that we continue to responsibly manage expenses across our organization. While we are unable to determine or predict the nature, duration or scope of the overall impact that the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, independent distributors, customers, and stockholders. Our Products Our products include the Protandim® line of scientifically-validated dietary supplements, LifeVantage® Omega+™, ProBio™, IC Bright™, and Daily Wellness™ dietary supplements, TrueScience®, our line of skin, bath & body, target relief, and hair care products, Petandim®, our companion pet supplement formulated to combat oxidative stress in dogs, Axio®, our nootropic energy drink mixes, and PhysIQ™, our smart weight management system. The Protandim® product line includes Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, and Protandim® NAD Synergizer®. The Protandim® NRF1 Synergizer® is formulated to increase cellular energy and performance by boosting mitochondria production to improve cellular repair and slow cellular aging. The Protandim® Nrf2 Synergizer® contains a proprietary blend of ingredients and has been shown to combat oxidative stress and enhance energy production by increasing the body's natural antioxidant protection at the genetic level, inducing the production of naturally-occurring protective antioxidant enzymes, including superoxide dismutase, catalase, and glutathione synthase. The Protandim® NAD Synergizer® was specifically formulated to target cell signaling pathways involved in the synthesis and recycling of a specific molecule called NAD (nicotinamide adenine dinucleotide), and has been shown to double sirtuin activity, supporting increased health, focus, energy, mental clarity and mood. Use of the three 21 -------------------------------------------------------------------------------- Protandim® products together has been shown to produce synergistic benefits greater than using the single products on their own. LifeVantage® Omega+™ is a dietary supplement that combines DHA and EPAOmega-3 fatty acids, Omega-7 fatty acids, and Vitamin D3 to support cognitive health, cardiovascular health, skin health, and the immune system. LifeVantage® ProBio is a dietary supplement designed to support optimal digestion and immune system function. LifeVantage® IC Bright™ combines macular carotenoids with vitamins and key ingredients that effectively support eye and brain health. LifeVantage® Daily Wellness™ is a dietary supplement designed to support and strengthen immune health. Our TrueScience® line of anti-aging skin and hair care, and CBD Nrf2 enhanced, bath & body, targeted relief products includes TrueScience® Facial Cleanser, TrueScience® Perfecting Lotion, TrueScience® Eye Serum, TrueScience® Anti-Aging Cream, TrueScience® Beauty Serum, TrueScience® Hand Cream, TrueScience® Invigorating Shampoo, TrueScience® Nourishing Conditioner, TrueScience® Scalp Serum, TrueScience® Body Lotion, TrueScience® Body Wash, TrueScience® Body Butter, TrueScience® Deodorant, TrueScience® Soothing Balm, and TrueScience® Body Rub. Petandim® is a supplement specially formulated to combat oxidative stress in dogs through Nrf2 activation. Axio® is our line of our nootropic energy drink mixes formulated to promote alertness and support mental performance. PhysIQ™ is our smart weight management system, which includes PhysIQ™ Fat Burn, PhysIQ™ Prebiotic and PhysIQ™ Whey Protein, all formulated to aid in weight management. We sell our products both individually and in stacks. A stack consists of multiple products bundled together that are designed to achieve a specific result. By studying the effects of nutrients and natural compounds, we have developed scientifically-backed nutrigenomics products that promote healthy aging on the cellular level. By stacking these products together, we have created a foundation for synergy from nutrigenomic products to promote a healthier life. The Vitality Stack™ includes four of our nutrigenomics products - Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, LifeVantage® Omega+™ and LifeVantage® ProBio. This product stack was designed to provide a foundation for wellness, supporting healthy organs, including the brain, heart, eyes, and other vitals. With the Ultimate Stack™, we added Protandim® NAD Synergizer® and PhysIQ™ Prebiotic to our Vitality Stack™ to support gut health and increase sirtuin activity, supporting increased health, focus, energy, mental clarity and mood. The Protandim® Tri-Synergizer™ consists of our Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer® and Protandim® NAD Synergizer®, and was designed to effectively and synergistically reduce oxidative stress, support mitochondria function, increase sirtuin activity, and target cell signaling pathways to fight the effects of aging. We also offer stacks that directly support the following consumer needs: immune support, heart health, energy, well-being, eye health, cognition and memory, metabolism, gut health, skin care, and hair care. We currently have additional products in development. Any delays or difficulties in introducing compelling products or attractive initiatives or tools into our markets may have a negative impact on our revenue and our ability to attract new independent distributors and customers.
Because we utilize a direct selling model for the distribution of a majority of our products, the success and growth of our business is primarily based on the effectiveness of our independent distributors to attract customers and sell our products and our ability to attract new and retain existing independent distributors. Changes in our product sales typically are the result of variations in product sales volume relating to fluctuations in the number of active independent distributors and customers purchasing our products. The number of active independent distributors and customers is, therefore, used by management as a key non-financial measure. 22 -------------------------------------------------------------------------------- The following tables summarize the changes in our active accounts base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated. For purposes of this report, we define "Active Accounts" as only those independent distributors and customers who have purchased from us at any time during the most recent three-month period, either for personal use or for resale. As of March 31, Change from Prior 2022 2021 Year Percent Change Active Independent Distributors Americas 38,000 61.3 % 42,000 66.7 % (4,000) (9.5) % Asia/Pacific & Europe 24,000 38.7 % 21,000 33.3 % 3,000 14.3 % Total Active Independent Distributors 62,000 100.0 % 63,000 100.0 % (1,000) (1.6) % Active Customers Americas 70,000 73.7 % 79,000 75.2 % (9,000) (11.4) % Asia/Pacific & Europe 25,000 26.3 % 26,000 24.8 % (1,000) (3.8) % Total Active Customers 95,000 100.0 % 105,000 100.0 % (10,000) (9.5) % Active Accounts Americas 108,000 68.8 % 121,000 72.0 % (13,000) (10.7) % Asia/Pacific & Europe 49,000 31.2 % 47,000 28.0 % 2,000 4.3 % Total Active Accounts 157,000 100.0 % 168,000 100.0 % (11,000) (6.5) % Results of Operations
Three and Nine Months End
Revenue. We generated net revenue of
$50.0 millionand $51.6 millionduring the three months ended March 31, 2022and 2021, respectively. We generated net revenue of $155.4 millionand $165.4 millionduring the nine months ended March 31, 2022and 2021, respectively. Foreign currency fluctuations negatively impacted our revenue $1.2 millionor 2.4% and $2.4 millionor 1.4% during the three and nine months ended March 31, 2022, respectively.
Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 % Change 2022 2021 % Change United States
$ 31,674 $ 34,068(7.0) % $ 98,868 $ 109,593(9.8) % Other 1,770 2,353 (24.8) % 5,732 7,386 (22.4) % Americas Total $ 33,444 $ 36,421(8.2) % $ 104,600 $ 116,979(10.6) % Revenue in the Americasregion for the three and nine months ended March 31, 2022and 2021, decreased $3.0 millionor 8.2% and $12.4 millionor 10.6%, respectively, from the prior year periods. Total Active Accounts decreased by 10.7% in the region compared to the prior year period which drove the decrease in revenue. Our Independent Distributors have been forced to continually adapt to the changing business and social environments due to the COVID-19 pandemic. We remain committed to providing digital tools and support to our distributors to help them grow their businesses despite difficulties with in person meetings and events and are rolling out new hybrid in person and virtual meeting opportunities to provide better training and business support to our distributors. 23 -------------------------------------------------------------------------------- Asia/Pacific& Europe. The following table sets forth revenue for the three and nine months ended March 31, 2022and 2021 for the Asia/Pacific& Europeregion and its principal markets (in thousands): Three Months Ended March 31, Nine Months Ended March 31, 2022 2021 % Change 2022 2021 % Change Japan $ 8,724 $ 9,622(9.3) % $ 28,558 $ 31,172(8.4) % Australia & New Zealand 2,941 2,808 4.7 % 9,840 7,791 26.3 % Greater China 1,099 881 24.7 % 3,894 3,178 22.5 % Other 3,796 1,838 106.5 % 8,526 6,285 35.7 % Asia/Pacific & Europe Total $ 16,560 $ 15,1499.3 % $ 50,818 $ 48,4264.9
Revenue in the
Asia/Pacific& Europeregion increased $1.4 millionor 9.3% and $2.4 millionor 4.9% for the three and nine months ended March 31, 2022and 2021, respectively, as compared to the prior year periods. Active Accounts in the region increased 4.3% compared to the prior year period. We continue to be encouraged by the results we are seeing in our Australia and New Zealandregion due to continued distributor leadership development and advancement within the region. The launch of Philippineshas also shown encouraging results. Japanrevenues continue to be down as compared to the prior year period due to continued restrictions in place for in person meetings and recruiting due to the COVID-19 pandemic and impacts from foreign currency exchange rate fluctuations. Overall, revenue in the Asia/Pacific& Europeregion was negatively impacted by foreign currency exchange rate fluctuations in the amount of approximately $1.2 millionor 8.1% and $2.5 millionor 5.3% during the three and nine months ended March 31, 2022, respectively, as compared to the prior year periods, mainly due to currency fluctuations in Japan, partially offset by currency benefits in other markets within the region. Revenue in Japanwas negatively impacted by foreign exchange rate fluctuations in the amount of approximately $0.8 millionor 8.8% and $2.1 millionor 6.8%, during the three and nine months ended March 31, 2022, respectively, as compared to the prior year periods. On a constant currency basis, revenue in Japanincreased 0.1% and decreased 0.3% for the three and nine months ended March 31, 2022and 2021, respectively, as compared to the prior year periods. Globally, our sales and marketing efforts continue to be directed toward strengthening our core business through our fiscal year initiatives and building our worldwide revenue. In October 2021, we held our first major event with both in person and virtual attendance options since the start of the COVID-19 global pandemic and we plan to hold additional in person meetings throughout the year as we are able. During our October 2021global convention, we launched our new LifeVantage® IC Bright™ eye health product and have plans for both continued product expansion and future market expansion during the remaining fiscal 2022. We expect this launch and other continued expansion will drive revenue growth globally through increased average order size and increased ability to attract and retain new independent distributors and customers with a compelling product lineup. Gross Margin. Our gross profit percentage for the three months ended March 31, 2022and 2021 was 80.7% and 82.9%, respectively. Our gross profit percentage for the nine months ended March 31, 2022and 2021 was 81.5% and 82.8%, respectively. The decrease in gross margins, as compared to the prior year periods, is primarily due to increased inventory obsolescence expenses and increased shipping to customer expenses during the current year period as well as shifts in geographic and product sales mix. Commissions and Incentives. Commissions and incentives expenses during the three months ended March 31, 2022were $23.2 millionor 46.4% of revenue as compared to $25.2 millionor 48.8% of revenue for the three months ended March 31, 2021. Commissions and incentives expenses during the nine months ended March 31, 2022were $72.8 millionor 46.8% of revenue as compared to $77.9 millionor 47.1% of revenue for the nine months ended March 31, 2021. The decrease in commissions and incentives expenses as a percentage of revenue as compared to the prior periods is due mainly to the timing and magnitude of our various promotional and incentive programs. Commissions and incentives expenses, as a percentage of revenue, may fluctuate in future periods based on ability to hold incentive trips and events and the timing and magnitude of compensation, incentive and promotional programs. Selling, General and Administrative. Selling, general and administrative expenses during the three months ended March 31, 2022were $15.3 millionor 30.6% of revenue as compared to $15.5 millionor 30.1% of revenue for the three months ended March 31, 2021. Selling, general and administrative expenses during the nine months ended March 31, 2022were $47.8 millionor 30.8% of revenue as compared to $48.0 millionor 29.0% of revenue for the nine months ended March 31, 2021. The increase in selling, general and administrative expenses as a percentage of revenue during the three and nine months ended March 31, 2022compared to the prior year periods is primarily due to increased event and travel expenses as restrictions related 24 --------------------------------------------------------------------------------
to the COVID-19 pandemic have begun to ease as well as increased legal expenses. These increases were offset slightly by decreases in salaries and wages and other employee related expenses.
We expect selling, general and administrative expenses, as a percent of revenue, to remain steady during the remainder of the fiscal year.
Total Other Expense. During the three months ended
March 31, 2022we recognized total net other expense of $0.1 millionas compared to $0.3 millionfor the three months ended March 31, 2021. During the nine months ended March 31, 2022, we recognized total net other expense of $0.4 millionas compared to $0.3 millionfor the nine months ended March 31, 2021.Total net other expense for the three and nine months ended March 31, 2022and 2021 consisted primarily of foreign currency losses and interest expense. Income Tax Expense. We recognized income tax expense of $0.6 millionand $1.1 million, respectively, for the three and nine months ended March 31, 2022, as compared to income tax expense of $0.1 millionand $2.8 million, respectively, for the three and nine months ended March 31, 2021. The effective tax rate was 20.2% of pre-tax income during the nine months ended March 31, 2022, compared to 25.7% for the prior year period. The change in the tax rate for the nine months ended March 31, 2022was mainly due to a change in estimate in our calculations of foreign-derived intangible income ("FDII") and foreign tax credits ("FTC"). The specific allocation of costs attributable foreign and domestic income led to an increase in the FDII deduction as well as the FTClimitation. We expect that our effective tax rate will fluctuate slightly during the remainder of fiscal 2022 as the impact of discrete items and other permanent differences are recognized during the year; however, our tax rate can be impacted by various book to tax differences and fluctuations in our stock price that occur during the year which are difficult to forecast.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost of our planned operating expenses and working capital (principally inventory purchases), fund capital expenditures, and service our debt, which includes any outstanding balances under the 2016 Credit Facility. We have generally relied on cash flow from operations to fund operating activities and we have, at times, incurred long-term debt in order to fund stock repurchases and strategic transactions.
During the nine months ended
March 31, 2022, our net cash provided by operating activities was $5.2 millionas compared to our net cash provided by operating activities of $7.9 millionduring the nine months ended March 31, 2021. During the nine months ended March 31, 2022, our net cash used in investing activities was $1.3 million, as a result of the purchase of fixed assets. During the nine months ended March 31, 2021, our net cash used in investing activities was $3.3 million, as a result of the purchase of fixed assets. Cash used in financing activities during the nine months ended March 31, 2022was $8.1 millionas a result of our repurchase of common stock and shares purchased as payment of tax withholding upon vesting of equity awards, partially offset by proceeds from stock issued under our employee stock purchase plan and stock option exercises. Cash used in financing activities during the nine months ended March 31, 2021was $7.8 millionas a result of our repurchase of common stock, and shares purchased as payment of tax withholding upon vesting of equity awards, partially offset by proceeds from stock issued under our employee stock purchase plan and stock option exercises. At March 31, 2022and June 30, 2021, the total amount of our foreign subsidiary cash was $8.9 millionand $8.8 million, respectively. The federal tax reform legislation that was passed into law during December 2017enacted a 100% dividend deduction for > 10% owned foreign corporations. Therefore, in the future, if needed, we expect to be able to repatriate cash from foreign subsidiaries without paying additional U.S.taxes. At March 31, 2022, we had working capital (current assets minus current liabilities) of $21.5 million, compared to working capital of $22.9 millionat June 30, 2021. We believe that our cash and cash equivalents balances and our ongoing cash flow from operations will be sufficient to satisfy our cash requirements for at least the next 12 months. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances and future cash flow from operations are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds, which may not be available on terms that are acceptable to us, or at all. Our credit facility, however, contains covenants that restrict our ability to raise additional funds in the 25 -------------------------------------------------------------------------------- debt markets and repurchase our equity securities without prior approval from the lender. Additionally, our credit facility, as amended, provides for a revolving loan facility in an aggregate principal amount up to $5.0 million. We would also consider realigning our strategic plans including a reduction in capital spending and expenses.
Shelf Registration Statement
March 24, 2020, we filed a shelf registration statement (the "Shelf Registration") on Form S-3 with the SECthat was declared effective April 3, 2020, which permits us to offer up to $75 millionof common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time. Our Shelf Registration is intended to provide us with additional flexibility to access capital markets for general corporate purposes, which may include, among other purposes, working capital, capital expenditures, other corporate expenses and acquisitions of assets, licenses, products, technologies or businesses.
2016 Credit Facility
March 30, 2016, we entered into a loan agreement (the "2016 Loan Agreement") to refinance our outstanding debt. In connection with the 2016 Loan Agreement and on the same date, we entered into a security agreement (the "Security Agreement"). The 2016 Loan Agreement provides for a term loan in an aggregate principal amount of $10.0 million(the "2016 Term Loan") and a revolving loan facility in an aggregate principal amount not to exceed $2.0 million(the "2016 Revolving Loan," and collectively with the 2016 Term Loan, the 2016 Loan Agreement and the Security Agreement, the "2016 Credit Facility"). The principal amount of the 2016 Term Loan was payable in consecutive quarterly installments in the amount of $0.5 millionplus accrued interest beginning with the fiscal quarter ended June 30, 2016. If we borrow under the 2016 Revolving Loan, interest will be payable quarterly in arrears on the last day of each fiscal quarter. On May 4, 2018, we entered into a loan modification agreement, which amended the 2016 Credit Facility ("Amendment No. 1"). Amendment No. 1 revised the maturity date from March 30, 2019to March 31, 2021and increased the fixed interest rate for the term loan from 4.93% to 5.68%. Amendment No. 1 also revised certain financial covenants. The minimum fixed charge coverage ratio (as defined in Amendment No. 1) was revised from a minimum of 1.50 to 1.00 to 1.25 to 1.00, measured on a trailing twelve-month basis, at the end of each fiscal quarter. The minimum working capital was increased from $5.0 millionto $8.0 million. The funded debt to EBITDA ratio was replaced with the total liabilities to tangible net worth ratio (as defined in Amendment No. 1) of not greater than 3.00 to 1.00 at the end of each quarter. The minimum tangible net worth measure was removed from the financial covenants. On February 1, 2019, we entered into a loan modification agreement, which further amended the 2016 Credit Facility ("Amendment No. 2"). Under Amendment No. 2, we made a principal payment of $2.0 millionand increased the revolving loan facility from $2.0 millionto $5.0 million. Amendment No. 2 also revised certain financial covenants. The minimum fixed charge coverage ratio (as defined in Amendment No. 2) was revised from a minimum of 1.25 to 1.00 to 1.10 to 1.00, measured on a trailing twelve-month basis, at the end of each fiscal quarter. The minimum working capital was decreased from $8.0 millionto $6.0 million. On April 1, 2021, we entered into a loan modification agreement ("Amendment No. 3"), which amended the 2016 Credit Facility, as previously amended. Amendment No. 3 revised the maturity date from March 31, 2021to March 31, 2024and modified the variable interest rate based on the one-month United StatesTreasury Rate, plus a margin of 3.00%, with an interest rate floor of 4.00%. Amendment No. 3 also revised the debt (total liabilities) to tangible net worth ratio (as defined in Amendment No. 3) covenant to require that we maintain this ratio not in excess of 2.00 to 1.00, measured as of the end of each fiscal quarter, and revised the definition and calculation of the minimum fixed charge coverage ratio (as defined in Amendment No. 3). There were no other changes to the covenants or revolving loan facility amount as set forth in Amendment No. 2. The 2016 Credit Facility, as amended, contains customary covenants, including affirmative and negative covenants that, among other things, restrict our ability to create certain types of liens, incur additional indebtedness, declare or pay dividends on or redeem capital stock, make other payments to holders of our equity interests, make certain investments, purchase or otherwise acquire all or substantially all the assets or equity interests of other companies, sell assets or enter into consolidations, mergers or transfers of all or any substantial part of our assets. As of March 31, 2022, we were in compliance with all applicable non-financial and restrictive covenants under the 2016 Credit Facility, as amended. The 2016 Credit Facility, as amended, also contains various financial covenants that require us to maintain certain consolidated working capital amounts, total liabilities to tangible net worth ratios and fixed charge coverage ratios. Specifically, we must: 26 --------------------------------------------------------------------------------
•Maintain a minimum fixed charge coverage ratio (as defined in the 2016 Loan Agreement, as amended) of at least 1.10 to 1.00 at the end of each fiscal quarter, measured on a trailing twelve month basis;
•Maintain minimum consolidated working capital (as defined in the 2016 Loan Agreement, as amended) at the end of each fiscal quarter of at least
•Maintain a ratio of debt (total liabilities) to tangible net worth (as defined in the 2016 Loan Agreement, as amended) of not greater than 2.00 to 1.00 at the end of each quarter, measured on a trailing twelve month basis. As of
March 31, 2022, we were in compliance with all applicable financial covenants under the 2016 Credit Facility, as amended. Additionally, management anticipates that in the normal course of operations we will be in compliance with the financial covenants during the ensuing year. During the fiscal year ended June 30, 2020, we repaid, in full, the remaining balance of the 2016 Term Loan in accordance with the terms of the 2016 Credit Facility, as amended. Commitments and Obligations
The following table summarizes our contractual payment obligations and commitments as of
Payments due by period Less than Contractual Obligations Total 1 year 1-3 years 3-5 years Thereafter
Operating lease obligations
Other operating obligations (1) 19,370 19,370 - - - Total
$ 38,663 $ 22,724 $ 4,077 $ 3,312 $ 8,550
(1) Other operating obligations represent contractual obligations primarily related to marketing and sponsorship commitments and purchases of inventory.
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 revenue and expenses during the periods presented. Actual results could differ from these estimates. Our significant accounting policies are described in Note 2 to our unaudited condensed consolidated 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 disclosures noted below.
Allowances for Product Returns
We record allowances for product returns at the time we ship the product based on estimated return rates. Subject to some exceptions based on local regulations, our return policy is to provide a full refund for product returned within 30 days. After 30 days of purchase, only unopened product that is in a resalable and restockable condition may be returned within twelve months of purchase and shall receive a 100% refund, less a 10% handling and restocking fee and any shipping and handling costs. As of
March 31, 2022, our shipments of products sold totaling approximately $17.6 millionwere subject to the return policy.
We monitor our product returns estimate on an ongoing basis and revise the allowances to reflect our experience. Our allowance for product returns was
27 -------------------------------------------------------------------------------- product expiration dates have not played any role in product returns, and we do not expect that they will in the future as it is unlikely that we will ship product with an expiration date earlier than the latest allowable product return date. Inventory Valuation We value our inventory at the lower of cost or net realizable value on a first-in first-out basis. Accordingly, we reduce our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its net realizable value. Factors utilized in the determination of net realizable value include: (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new production introductions, (v) product expiration dates, and (vi) component and packaging obsolescence. During the three months ended
March 31, 2022and 2021, we recognized expenses of approximately $0.5 millionand $0.2 million, respectively, related to obsolete and slow-moving inventory. During the nine months ended March 31, 2022and 2021, we recognized expenses of approximately $1.0 millionand $0.3 million, respectively, related to obsolete and slow-moving inventory.
Revenue is recognized when control of the promised goods or services are transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales, value-added, and other taxes that we collect concurrent with revenue-producing activities are excluded from revenue.
We use the fair value approach to account for stock-based compensation in accordance with current accounting guidance. We recognize compensation costs for awards with performance conditions when we conclude it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each balance sheet date and adjust compensation costs based on our probability assessment. For awards with market-based performance conditions, the cost of the awards is recognized as the requisite service is rendered by the employees, regardless of when, if ever, the market-based performance conditions are satisfied.
Research and Development Costs
We expense all of our costs related to research and development activities as incurred.
Legal Accruals We are occasionally involved in lawsuits and disputes arising in the normal course of business. Management regularly reviews all pending litigation matters in which we are involved and establishes accruals as we deem appropriate for these litigation matters when a probable loss estimate can be made. Estimated accruals require management judgment about future events. The results of lawsuits are inherently unpredictable and unfavorable resolutions could occur. As such, the amount of loss may differ from management estimates.
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