lfvn-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________

Form 10-Q

________________________________________________________________________________


☒			QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-35647

________________________________________________________________________________

LIFEVANTAGE CORPORATION

(Exact name of Registrant as specified in its charter)

________________________________________________________________________________


Delaware						90-0224471
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

3300 Triumph Blvd, Suite 700, Lehi, UT 84043

(Address of principal executive offices, including zip code)

(801) 432-9000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.0001

LFVN

The Nasdaq Stock Market LLC

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	☒
Non-accelerated filer	¨	Smaller reporting company	☒
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the issuer’s common stock, par value $0.0001 per share, as of November 1, 2021 was 13,243,338.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, in particular “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the information incorporated by reference herein contains “forward-looking statements” (as such term is defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended). These statements, which involve risks and uncertainties, reflect our current expectations, intentions, or strategies regarding our possible future results of operations, performance, and achievements. Forward-looking statements include, without limitation: statements regarding future products or product development; statements regarding future selling, general and administrative costs and research and development spending; statements regarding the future performance of our network marketing efforts; statements regarding our expectations regarding ongoing litigation; statements regarding international growth; and statements regarding future financial performance, results of operations, 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 rules of the Securities and Exchange Commission and common law.

These forward-looking statements may be identified in this report and the information incorporated by reference by 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:

•Inability to properly manage, motivate and retain our independent distributors or to attract new customers and independent distributors on an ongoing basis;

•The COVID-19 pandemic or the widespread outbreak of any other illness or communicable disease or any other public health crisis, could adversely affect our business, results of operations and financial condition;

•Inability to protect against cyber security risks and to maintain the integrity of data;

•Inability to manage existing markets, open new international markets or expand our operations;

•Non-compliance by our independent distributors with applicable legal requirements or our policies and procedures, including making improper and/or illegal claims about our products or earnings opportunity;

•Inability of new products and technological innovations to gain customer or independent distributor or market acceptance;

•Inability to execute our product launch process due to increased pressure on our supply chain, information systems and management;

•Inability to appropriately manage our inventory;

•Potential adverse effects on our business and stock price due to ineffective internal controls;

•Disruptions in our information technology systems;

•Inability to comply with financial covenants imposed by our credit facility and the impact of debt service obligations and restrictive debt covenants;

•International trade or foreign exchange restrictions, increased tariffs, foreign currency exchange fluctuations;

•Inability to raise additional capital or complete desired acquisitions;

•Dependence upon a few products for revenue;

•High quality materials for our products may become difficult to obtain or expensive;

•Dependence on third parties to manufacture our products;

•Disruptions to the transportation channels used to distribute our products;

•We may be subject to a product recall;

•Unfavorable publicity on our business or products;

•Our direct selling program could be found to not be in compliance with current or newly adopted laws or regulations in various markets;

•Legal proceedings may be expensive and time consuming;

•Strict government regulations on our business;

•Regulations governing the production or marketing of our products;

•Risk of investigatory and enforcement action;

•Government authorities may question our tax positions or transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business;

•Failure to comply with anti-corruption laws;

•Loss of, or inability to attract, key personnel;

•We may be held responsible for certain taxes or assessments and other obligations relating to the activity of our independent distributors;

•Competition in the dietary supplement and personal care markets;

•Our inability to protect our intellectual property rights;

•Third party claims that we infringe on their intellectual property;

•Product liability claims against us;

•Economic, political, foreign exchange and other risks associated with international operations;

•Potential delisting of our common stock due to non-compliance with Nasdaq's continued listing requirements;

•Volatility of the market price of our common stock;

•Substantial sales of shares may negatively impact the market price of our common stock; and

•Dilution of outstanding common shares may occur if holders of our existing options exercise their securities or upon future vesting of restricted stock units.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. Except as required by law, 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.

LIFEVANTAGE CORPORATION

INDEX



		PAGE
PART I. Financial Information		5
Item 1.	Financial Statements:	5
	Condensed Consolidated Balance Sheets (unaudited)	5
	Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited)	6
	Condensed Consolidated Statement of Stockholders’ Equity (unaudited)	7
	Condensed Consolidated Statements of Cash Flows (unaudited)	9
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II. Other Information		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	31
Signatures		32

PART I. Financial Information

Item 1. Financial Statements

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2021		June 30, 2021
(In thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents	$	19,929	$	23,174
Accounts receivable	3,254		2,925
Income tax receivable	—		1,038
Inventory, net	16,079		16,145

Prepaid expenses and other	5,641		4,772
Total current assets	44,903		48,054

Property and equipment, net	10,738		11,123
Right-of-use assets	13,079		13,700
Intangible assets, net	686		719
Deferred income tax asset	2,290		1,208
Equity securities	2,205		2,205
Other long-term assets	1,696		1,723
TOTAL ASSETS	$	75,597	$	78,732

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	4,842	$	6,744
Commissions payable	7,933		8,138


Income tax payable	1,470		830
Lease liabilities	2,445		2,151
Other accrued expenses	5,585		7,336

Total current liabilities	22,275		25,199





Long-term lease liabilities	15,321		16,032
Other long-term liabilities	691		694
Total liabilities	38,287		41,925
Commitments and contingencies - Note 8
Stockholders’ equity
Preferred stock — par value $0.0001 per share, 5,000 shares authorized, no shares issued or outstanding	—		—
Common stock — par value $0.0001 per share, 40,000 shares authorized and 13,236 and 13,609 issued and outstanding as of September 30, 2021 and June 30, 2021, respectively	1		1
Additional paid-in capital	129,862		129,048
Accumulated deficit	(92,522)		(92,346)
Accumulated other comprehensive (loss) income	(31)		104
Total stockholders’ equity	37,310		36,807
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	75,597	$	78,732

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,
	2021		2020
(In thousands, except per share data)
Revenue, net	$	53,224	$	54,827
Cost of sales	9,431		9,398
Gross profit	43,793		45,429
Operating expenses:
Commissions and incentives	24,105		25,633
Selling, general and administrative	15,076		16,299


Total operating expenses	39,181		41,932
Operating income	4,612		3,497
Other expense:
Interest expense, net	(3)		(6)
Other expense, net	(177)		(141)

Total other expense	(180)		(147)
Income before income taxes	4,432		3,350
Income tax expense	(1,116)		(899)
Net income	$	3,316	$	2,451
Net income per share:
Basic	$	0.25	$	0.17
Diluted	$	0.25	$	0.17
Weighted-average shares outstanding:
Basic	13,394		14,269
Diluted	13,469		14,695
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment	$	(135)	$	160

Other comprehensive (loss) income, net of tax	(135)		160
Comprehensive income	$	3,181	$	2,611

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Total
	Shares	Amount
(In thousands)
Balances, June 30, 2021	13,609	$	1	$	129,048	$	(92,346)	$	104	$	36,807

Stock-based compensation	—	—		645		—		—		645
Exercise of options	30	—		133		—		—		133
Common stock issued under equity award plans	49	—		—		—		—		—
Shares canceled or surrendered as payment of tax withholding and other	(19)	—		(139)		—		—		(139)
Repurchase of company stock	(460)	—		—		(3,492)		—		(3,492)
Common stock issued under employee stock purchase plan	27	—		175		—		—		175
Currency translation adjustment	—	—		—		—		(135)		(135)
Net income	—	—		—		3,316		—		3,316
Balances, September 30, 2021	13,236	$	1	$	129,862	$	(92,522)	$	(31)	$	37,310

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (CONTINUED)

(Unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Total
	Shares	Amount
(In thousands)
Balances, June 30, 2020	14,313	$	1	$	126,416	$	(93,307)	$	144	$	33,254

Stock-based compensation	—	—		520		—		—		520
Exercise of options	2	—		11		—		—		11
Common stock issued under equity award plans	74	—		—		—		—		—
Shares canceled or surrendered as payment of tax withholding and other	(38)	—		(506)		—		—		(506)
Repurchase of company stock	(136)	—		—		(2,000)		—		(2,000)
Common stock issued under employee stock purchase plan	23	—		246		—		—		246
Currency translation adjustment	—	—		—		—		160		160
Net income	—	—		—		2,451		—		2,451
Balances, September 30, 2020	14,238	$	1	$	126,687	$	(92,856)	$	304	$	34,136

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended September 30,
	2021		2020
(In thousands)
Cash Flows from Operating Activities:
Net income	$	3,316	$	2,451
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	793		1,132

Stock-based compensation	645		464
Amortization of right-of-use assets	558		1,113




Deferred income tax	(1,082)		(254)
Changes in operating assets and liabilities:
Accounts receivable	(366)		304
Income tax receivable	1,039		(97)
Inventory, net	(45)		(772)
Prepaid expenses and other	(877)		(583)
Other long-term assets	13		(313)
Accounts payable	(1,891)		1,194
Income tax payable	640		(182)
Other accrued expenses	(1,873)		(5,210)
Lease liabilities	(384)		(598)
Other long-term liabilities	(21)		298
Net Cash Provided by (Used in) Operating Activities	465		(1,053)
Cash Flows from Investing Activities:



Purchase of property and equipment	(378)		(960)
Net Cash Used in Investing Activities	(378)		(960)
Cash Flows from Financing Activities:



Repurchase of company stock	(3,492)		(2,000)

Shares canceled or surrendered as payment of tax withholding and other	(139)		(506)
Proceeds from common stock issued under employee stock purchase plan	175		246
Exercise of options	133		11
Net Cash Used in Financing Activities	(3,323)		(2,249)
Foreign Currency Effect on Cash	(9)		84
Decrease in Cash and Cash Equivalents:	(3,245)		(4,178)
Cash and Cash Equivalents — beginning of period	23,174		22,138
Cash and Cash Equivalents — end of period	$	19,929	$	17,960



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	3	$	6
Cash paid for income taxes	$	468	$	1,313

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes of LifeVantage Corporation (the “Company”) as of and for the year ended June 30, 2021 included in the annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 19, 2021.

Note 1 — Organization and Basis of Presentation

LifeVantage Corporation is a company focused on nutrigenomics, the study of how nutrition and naturally occurring compounds affect human genes to support good health. The Company is dedicated to helping people achieve their health, wellness and financial goals. The Company provides quality, scientifically-validated products to customers and independent distributors as well as a financially rewarding commission-based direct sales opportunity to its independent distributors. LifeVantage sells its 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, and Singapore. The Company also sells its products in a number of countries to customers for personal consumption only. In addition, the Company sells its products in China through a China approved cross-border e-commerce business model.

The Company engages 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. The Company’s line of scientifically-validated dietary supplements includes its flagship Protandim® family of products, LifeVantage® Omega+, ProBio, and Daily Wellness dietary supplements, TrueScience® is the Company's line of skin, hair, bath & body, and targeted relief products. The Company also markets and sells Petandim®, its companion pet supplement formulated to combat oxidative stress in dogs, Axio® its nootropic energy drink mixes, and PhysIQ™, its smart weight management system.

The condensed consolidated financial statements included herein have been prepared by the Company’s management, without audit, pursuant to the rules and regulations of the SEC. In the opinion of the Company’s management, these interim financial statements include all adjustments that are considered necessary for a fair presentation of its financial position as of September 30, 2021, and the results of operations for the three months ended September 30, 2021 and 2020, and the cash flows for the three months ended September 30, 2021 and 2020. Interim results are not necessarily indicative of results for a full year or for any future period.

The condensed consolidated financial statements and notes included herein are presented as required by Form 10-Q, and do not contain certain information included in the Company’s audited financial statements and notes for the fiscal year ended June 30, 2021, 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, 2021, and included in the annual report on Form 10-K on file with the SEC.

Note 2 — Summary of Significant Accounting Policies

Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The Company prepares the condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, the Company is required to use estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. On an ongoing basis, the Company reviews its estimates, including, but not limited to, those related to inventory valuation and obsolescence, sales returns, income taxes and tax valuation reserves, transfer pricing methodology and positions, impairment of assets, share-based compensation, and loss contingencies.

Foreign Currency Translation

A portion of the Company’s business operations occurs outside the United States. The local currency of each of the Company’s subsidiaries is generally its functional currency. All assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted-average exchange rates and stockholders’ equity is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded

as a separate component of stockholders’ equity in the condensed consolidated balance sheets and as a component of comprehensive income. Transaction gains and losses are included in other expense, net in the condensed consolidated statements of operations and comprehensive income. For the three months ended September 30, 2021 and 2020, net foreign currency losses of $0.2 million and gains of $0.1 million, respectively, are recorded in other expense, net.

Derivative Instruments and Hedging Activities

The Company's subsidiaries enter into transactions with each other which may not be denominated in the respective subsidiaries' functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of derivatives. The Company does not use such derivative financial instruments for trading or speculative purposes.

To hedge risks associated with the foreign-currency-denominated intercompany transactions, the Company entered into forward foreign exchange contracts which were all settled by the end of September 2021 and were not designated for hedge accounting. For the three months ended September 30, 2021 and 2020, realized losses of $30,000 and $0.2 million, respectively, related to forward contracts, are recorded in other expense, net. The Company did not hold any derivative instruments at September 30, 2021.

Cash and Cash Equivalents

The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.

Concentration of Credit Risk

Accounting guidance for financial instruments requires disclosure of significant concentrations of credit risk regardless of the degree of such risk. Financial instruments with significant credit risk include cash and investments. At September 30, 2021, the Company had $12.9 million in cash accounts at one financial institution and $7.0 million in accounts at other financial institutions. At June 30, 2021, the Company had $17.2 million in cash accounts at one financial institution and $6.0 million in accounts at other financial institutions. As of September 30, 2021 and June 30, 2021, and during the periods then ended, the Company’s cash balances exceeded federally insured limits.

Accounts Receivable

The Company’s accounts receivable as of September 30, 2021 and June 30, 2021 consist primarily of credit card receivables. Based on the Company’s verification process for customer credit cards and historical information available, management has determined that an allowance for doubtful accounts on credit card sales related to its customer sales as of September 30, 2021 is not necessary. No bad debt expense was recorded during the three months ended September 30, 2021 and 2020.

Inventory

As of September 30, 2021 and June 30, 2021, inventory consisted of (in thousands):


	September 30, 2021				June 30, 2021
Finished goods	$	12,078	75.1	%	$	12,225	75.7	%
Raw materials	4,001		24.9	%	3,920		24.3	%
Total inventory	$	16,079	100.0	%	$	16,145	100.0	%

Inventories are carried at the lower of cost or net realizable value, using the first-in, first-out method, which includes a reduction in inventory values of $0.7 million and $0.5 million at September 30, 2021 and June 30, 2021, respectively, related to obsolete and slow-moving inventory.

Fair Value of Financial Instruments

The Company accounts for assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

•Level 1—Quoted prices for identical instruments in active markets;

•Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

•Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Equity securities held by the Company are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs (level 3), in certain circumstances (e.g., when there is evidence of impairment).

Revenue Recognition

Revenue is recognized when control of the promised goods or services are transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.

The Company generates the majority of its revenue through product sales to customers. These products include the Protandim® line of dietary supplements, LifeVantage® Omega+, ProBio, and Daily Wellness dietary supplements, TrueScience® skin, hair, bath & body and targeted relief, Petandim®, Axio® nootropic energy drink mixes, and the PhysIQ™ smart weight management system. The Company ships most of its product directly to the consumer and receives substantially all payment for product sales in the form of credit card receipts. Revenue from direct product sales to customers is recognized upon shipment, which is when passage of title and risk of loss occurs. For items sold in packs and bundles, the Company determines the standalone selling price at contract inception for each distinct good, and then allocates the transaction price on a relative standalone selling price basis. Any discounts are accounted for as a direct reduction to the transaction price. Shipping and handling revenue is recognized upon shipment when the performance obligation is completed.

The Company also charges independent distributors to attend certain events that it holds. Tickets to events are sold as standalone items or included within packs. For event tickets sold in packs, the Company allocates a portion of the transaction price to the ticket on a relative standalone selling price basis. Any discounts are accounted for as a direct reduction to the transaction price. Fee revenue associated with ticket sales is recorded in the month that the event is held, which is when the Company has performed its obligations under the contract.

Estimated returns are recorded when product is shipped. Subject to some exceptions based on local regulations, the Company’s 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. The Company establishes a refund liability reserve, and an asset reserve for its right to recover products, based on historical experience. The returns asset reserve and returns liability reserve are evaluated on a quarterly basis. As of September 30, 2021 and June 30, 2021, the returns liability reserve, net was $0.1 million and $0.2 million, respectively.

Shipping and Handling

Shipping and handling costs associated with inbound freight and freight out to customers and independent distributors are included in cost of sales. Shipping and handling fees charged to customers and independent distributors are included in revenue.

Research and Development Costs

The Company expenses all costs related to research and development activities, as incurred. Research and development expenses for the three months ended September 30, 2021 and 2020 were $0.2 million and $0.2 million, respectively.

Leases

The Company accounts for leases in accordance with Accounting Standards Codification ("ASC") 842. The Company reviews all contracts and determines if the arrangement is or contains a lease, at inception. Operating leases are included in right-of-use (“ROU”) assets, current lease liabilities and long-term lease liabilities on the condensed consolidated balance sheets. The Company does not have any finance leases.

Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any upfront lease payments

made and excludes lease incentives and initial direct costs incurred. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recorded on the balance sheet. The Company’s lease agreements do not contain any residual value guarantees.

The pandemic caused by coronavirus (“COVID-19”) has resulted in disruptions which have forced the Company's corporate workforce to a remote working environment. On September 1, 2020, the Company abandoned the ROU asset related to the Corporate office lease in Sandy, Utah, as this lease terminated in February 2021. A new Corporate office was opened in Lehi, Utah in January 2021.

As a result of the abandonment of the Sandy, Utah office, operating lease expenses related to the ROU asset, along with the remaining leasehold assets in the office, have been reduced to their salvage values, which the Company has determined to be zero. The total expense related to the abandonment of the ROU asset for the three months ended September 30, 2020 was $0.8 million and is included in selling, general, and administrative expenses. There is no remaining lease liability for the Sandy, Utah office at September 30, 2021.

Stock-Based Compensation

The Company recognizes stock-based compensation by measuring the cost of services to be rendered based on the grant date fair value of the equity award. The Company recognizes stock-based compensation, net of any estimated forfeitures, over the period an employee is required to provide service in exchange for the award, generally referred to as the requisite service period. For awards with market-based performance conditions, the cost of the awards is recognized as the requisite service is rendered by employees, regardless of when, if ever, the market-based performance conditions are satisfied.

The Black-Scholes option pricing model is used to estimate the fair value of stock options and options under the Company's 2019 Employee Stock Purchase Plan. The determination of the fair value of options is affected by the Company's stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company uses historical data for estimating the expected volatility and expected life of stock options required in the Black-Scholes model. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the stock options.

The fair value of restricted stock grants is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield. The fair value of performance restricted stock units that include market-based performance conditions is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield, with further adjustments made to reflect the market conditions that must be satisfied in order for the units to vest by using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model include the risk-free rate, expected volatility, expected dividends and the correlation coefficient. The fair value of cash-settled performance-based awards, accounted for as liabilities, is remeasured at the end of each reporting period and is based on the closing market price of the Company’s stock on the last day of the reporting period. The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance conditions will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs accordingly.

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, updated as needed for changes in corporate tax rates. 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. The Company recognizes tax liabilities or benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized would be the largest liability or benefit that the Company believes has greater than a 50% likelihood of being realized upon settlement.

For the three months ended September 30, 2021 and 2020, the Company recognized income tax expense of $1.1 million and $0.9 million, respectively, which is reflective of the Company’s current estimated federal, state and foreign effective tax rate. Realization of deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain.

Income Per Share

Basic income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period, less unvested restricted stock awards. Diluted income per common share is computed by dividing net income by the weighted-average common shares and potentially dilutive common share equivalents using the treasury stock method.

For the three months ended September 30, 2021 and 2020, the effects of approximately 0.2 million and 0.2 million common shares, respectively, issuable upon exercise of options and non-vested shares of restricted stock are not included in computations as their effect was anti-dilutive.

The following is a reconciliation of net income per share and the weighted-average common shares outstanding for purposes of computing basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended September 30,
	2021		2020
Numerator:
Net income	$	3,316	$	2,451
Denominator:
Basic weighted-average common shares outstanding	13,394		14,269
Effect of dilutive securities:
Stock awards and options	75		426

Diluted weighted-average common shares outstanding	13,469		14,695
Net income per share, basic	$	0.25	$	0.17
Net income per share, diluted	$	0.25	$	0.17

Segment Information

The Company operates in a single operating segment by selling products directly to customers and through an international network of independent distributors that operates in an integrated manner from market to market. Commissions and incentives expenses are the Company’s largest expense comprised of the commissions paid to its independent distributors. The Company manages its business primarily by managing its international network of independent distributors. The Company disaggregates revenue in two geographic regions: the Americas region and the Asia/Pacific & Europe region.

The following table presents the Company's revenue disaggregated by these two geographic regions (in thousands):


	Three Months Ended September 30,
	2021		2020
Americas	$	36,449	$	38,675
Asia/Pacific & Europe	16,775		16,152
Total revenue	$	53,224	$	54,827

Additional information as to the Company’s revenue from operations in the most significant geographical areas is set forth below (in thousands):


	Three Months Ended September 30,
	2021		2020
United States	$	34,297	$	36,108
Japan	$	9,844	$	10,431

The following table presents the Company's long-lived assets for its most significant geographic markets (in thousands):


	September 30, 2021		June 30, 2021
United States	$	22,063	$	22,696
Japan	$	3,072	$	3,363

Note 3 — Gig Economy Group Investment

Convertible Note Receivable

The Company entered into a convertible promissory note agreement with Gig Economy Group, Inc. ("GEG") pursuant to which the Company agreed to loan to GEG up to an aggregate of $2.0 million in a series of loan installments, evidenced by a convertible promissory note having a maturity date of May 31, 2019 ("Convertible Note"). The Convertible Note accrued interest at a rate of 8% per annum, compounded annually. On May 17, 2019, the Company and GEG entered into an amendment agreement to extend the maturity date of the Convertible Note to December 31, 2019. In all other aspects, the Convertible Note remained unchanged from the original agreement. Pursuant to a Common Stock Purchase Agreement between the Company and GEG dated December 16, 2019, GEG issued to the Company 1,000,000 shares of GEG’s common stock in consideration for conversion and cancellation of all principal, interest and other amounts due under the Convertible Note (representing $2.2 million in aggregate consideration).

Equity Securities under ASC 321

Upon conversion of the convertible promissory note receivable with GEG, the Company held a minority interest (less than 20%) in GEG, accounted for under ASC 321, Investments - Equity Securities ("ASC 321"), which is included in equity securities in the condensed consolidated balance sheets. Dividends received are reported in earnings if and when received. The Company reviews securities individually for impairment by evaluating if events or circumstances have occurred that may indicate the fair value of the investment is less than its carrying value. If such events or circumstances have occurred, the Company estimates the fair value of the investment and recognizes an impairment loss in other expense, net on the condensed consolidated statements of operations and comprehensive income equal to the difference between the fair value of the investment and its carrying value. In such cases, the estimated fair value of the investment is determined using unobservable inputs including assumptions by GEG's management and quantitative information such as lower valuations in recently completed or proposed financings. These inputs are classified as Level 3. Because GEG is in the early startup stage, GEG is subject to potential changes in cash flows and valuation, and may be unable to raise additional capital necessary to support its ongoing operations, which may result in future impairment.

Equity securities held by the Company lack readily determinable fair values and therefore the securities are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar equity securities of the same issuer. The carrying amount of equity securities held by the Company without readily determinable fair values was $2.2 million at September 30, 2021 and June 30, 2021, respectively. During the three months ended September 30, 2021 and 2020, there were no price changes or impairments recognized.

Note 4 — Leases

The Company has operating leases for current corporate offices and certain equipment. These leases have remaining terms of approximately one to ten years. As of September 30, 2021, the weighted average remaining lease term and weighted average discount rate for operating leases was 8.84 years and 3.31%, respectively.

For the three months ended September 30, 2021 and 2020, operating lease expense was $0.8 million and $1.2 million, respectively.

Supplemental cash flow information related to operating leases was as follows (in thousands):


	Three Months Ended September 30,
	2021		2020
Operating cash outflows from operating leases	$	768	$	616
Right-of-use assets obtained in exchange for lease obligations	$	—	$	14,682

Maturity of lease liabilities at September 30, 2021 are as follows (in thousands):


Year ended June 30,	Amount
2022 (remaining nine months ending June 30, 2022)	$	2,042
2023	3,150
2024	1,872
2025	1,606
2026	1,646
Thereafter	9,810
Total	20,126
Less: imputed interest	(2,360)
Present value of lease liabilities	$	17,766

Note 5 — Long-Term Debt

On March 30, 2016, the Company entered into a loan agreement (the “2016 Loan Agreement”) to refinance its outstanding debt. In connection with the 2016 Loan Agreement and on the same date, the Company 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 is payable in consecutive quarterly installments in the amount of $0.5 million plus accrued interest beginning with the fiscal quarter ended June 30, 2016. If the Company borrows under the 2016 Revolving Loan, interest will be payable quarterly in arrears on the last day of each fiscal quarter.

On May 4, 2018, the Company 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, 2019 to March 31, 2021 and 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 million to $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.

The Company’s obligations under the 2016 Credit Facility, as amended, are secured by a security interest in substantially all of the Company’s assets. Loans outstanding under the 2016 Credit Facility, as amended, may be prepaid in whole or in part at any time without premium or penalty. In addition, if, at any time, the aggregate principal amount outstanding under the 2016 Revolving Loan exceeds $2.0 million, the Company must prepay an amount equal to such excess. Any principal amount of the 2016 Term Loan which is prepaid or repaid may not be re-borrowed.

On February 1, 2019, the Company entered into a loan modification agreement, which further amended the 2016 Credit Facility ("Amendment No. 2"). Under Amendment No. 2, the Company made a principal payment of $2.0 million and increased the revolving loan facility from $2.0 million to $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 million to $6.0 million.

On April 1, 2021, the Company 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, 2021 to March 31, 2024 and modified the variable interest rate based on the one-month United States Treasury 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 the Company 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 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 the Company’s 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 equity interests in the Company, 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 the Company’s assets. The 2016 Credit Facility, as amended, also contains various financial covenants that require the Company to maintain certain consolidated working capital amounts, total liabilities to tangible net worth ratios and fixed charge coverage ratios. Additionally, the 2016 Credit Facility, as amended, contains cross-default provisions, whereby a default under the terms of certain indebtedness or an uncured default of a payment or other material obligation of the Company under a material contract of the Company will cause a default on the remaining indebtedness under the 2016 Credit Facility, as amended. As of September 30, 2021, the Company was in compliance with all applicable covenants under the 2016 Credit Facility, as amended.

The Company’s book value for the 2016 Credit Facility, as amended, approximates the fair value. During the fiscal year ended June 30, 2020, the Company repaid, in full, the remaining balance of the 2016 Term Loan in accordance with the terms of the 2016 Cr