LIFEVANTAGE CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes, which are included in this Annual Report on Form 10-K. Overview 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 theAmericas region and theAsia/Pacific & 40 --------------------------------------------------------------------------------
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.
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 inthe United States ,Mexico ,Japan ,Australia ,Hong Kong ,Canada ,Thailand , theUnited Kingdom ,the Netherlands ,Germany ,Taiwan ,Austria ,Spain ,Ireland ,Belgium ,New Zealand ,Singapore , andthe Philippines . In addition, we sell our products in a number of countries to customers for personal consumption only and inChina through aChina approved 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 COVID-19 has continued to disrupt and adversely affect our business in fiscal year 2022. As of the date of this filing, we have experienced multiple disruptions at times at the corporate level as we have transitioned our corporate workforce from a remote working environment, to a hybrid work from home/work in the office schedule. We have continued to experience temporary closures of some of our overseas showrooms and will call locations in international markets and have experienced cancelled multiple planned large group events in order to comply with group meeting restrictions in certain markets. Our independent distributors have also experienced disruptions. Specifically, inJapan , 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 negatively affected the ability for independent distributors to meet people in person and commence the enrollment process. To mitigate these effects and in an effort to sustain their sales volume, our independent distributors have adapted their approach for customer outreach and enrollment, including transitioning to a stronger social media presence. 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 uncertain times. Near the end of fiscal year 2020 we transitioned all of our corporate employees to a work from home model and duringJuly 2021 we began to implement a hybrid schedule with opportunities for employees to return back to the office. That hybrid schedule continues to be in effect today. 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. 41 --------------------------------------------------------------------------------
Our Products
Our products are the Protandim® line of scientifically-validated dietary supplements, LifeVantage® Omega+ , ProBio 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 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 andEPA Omega-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® 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, TrueScience® Body Rub, and TrueScience® Liquid Collagen. 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 PhysIQFat Burn , PhysIQ Prebiotic and PhysIQ Whey Protein, all formulated to aid in weight management. IC Bright® helps support eye and brain health, reduce eye fatigue and strain, supports cognitive functions, and may help support normal sleep patterns. We believe our significant number of customers who regularly and repeatedly purchase our products is a strong indicator of the health benefits of our products. The following table shows revenues by major product line for the fiscal years endedJune 30, 2022 , 2021 and 2020: Years ended June 30, 2022 2021 2020 Protandim® product line$ 135,616 65.7 %$ 150,272
68.2 %
TrueScience® product line 22,877 11.1 % 22,617
10.3 % 23,739 10.2 % Other 47,867 23.2 % 47,292 21.5 % 52,841 22.7 % Total$ 206,360 100.0 %$ 220,181 100.0 %$ 232,915 100.0 % Our revenue is largely attributed to two product lines, Protandim® and TrueScience®, which each accounted for more than 10% of total revenue for each of the fiscal years endedJune 30, 2022 , 2021 and 2020. On a combined basis, these product lines represent approximately 76.8%, 78.5% and 77.3% of our total net revenue for the fiscal years endedJune 30, 2022 , 2021 and 2020, respectively. 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.
Accounts
Because we primarily utilize a direct selling model for the distribution of a
majority of our products, the success and growth of our business depends in
large part on the effectiveness of our independent distributors to attract and
retain customers to sell our products to, and our ability to attract new and
retain existing independent distributors. Changes in our product sales are
typically 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.
The following tables summarize the changes in our active accounts 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
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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 June 30,
Change from Prior
2022 2021 Year Percent Change
Active Independent Distributors
Americas 37,000 58.7 % 41,000 65.1 % (4,000) (9.8) %
Asia/Pacific & Europe 26,000 41.3 % 22,000 34.9 % 4,000 18.2 %
Total Active Independent
Distributors 63,000 100.0 % 63,000 100.0 % - - %
Active Customers
Americas 69,000 74.2 % 78,000 72.9 % (9,000) (11.5) %
Asia/Pacific & Europe 24,000 25.8 % 29,000 27.1 % (5,000) (17.2) %
Total Active Customers 93,000 100.0 % 107,000 100.0 % (14,000) (13.1) %
Active Accounts
Americas 106,000 67.9 % 119,000 70.0 % (13,000) (10.9) %
Asia/Pacific & Europe 50,000 32.1 % 51,000 30.0 % (1,000) (2.0) %
Total Active Accounts 156,000 100.0 % 170,000 100.0 % (14,000) (8.2) %
Income Statement Presentation
We report revenue in two geographic regions and we translate revenue from each
market's local currency into U.S. Dollars using weighted-average exchange rates.
Revenue consists primarily of product sales, fee revenue, and shipping and
handling fees, net of applicable sales discounts. Revenue is recognized at the
time of shipment, which is when the passage of title and risk of loss to
customers occurs. Also reflected in revenue is a provision for product returns
and allowances, which is estimated based on our historical experience. The
following table sets forth net revenue information by region for the years
indicated. The following table should be reviewed in connection with the tables
presented under "Results of Operations" (in thousands):
For the fiscal years ended June 30,
2022 2021 2020
Americas $ 138,323 67.0 % $ 154,655 70.2 % $ 166,336 71.4 %
Asia/Pacific & Europe 68,037 33.0 % 65,526 29.8 % 66,579 28.6 %
Total $ 206,360 100.0 % $ 220,181 100.0 % $ 232,915 100.0 %
Cost of sales primarily consists of costs of products purchased from and
manufactured by third-party vendors, shipping and order fulfillment costs, costs
of adjustments to inventory carrying value, and costs of marketing materials
which we sell to our independent distributor sales force, as well as freight,
duties and taxes associated with the import and export of our products. As our
international revenue increases as a percentage of total revenue, cost of sales
as a percentage of revenue likely will increase as a result of additional
duties, freight, and other factors, such as changes in currency exchange rates.
Commissions and incentives expenses are our most significant expenses and are
classified as operating expenses. Commissions and incentives expenses include
sales commissions paid to our independent distributors, special incentives and
costs for incentive trips and other rewards. Commissions and incentives expenses
do not include any amounts we pay to our independent distributors related to
their personal purchases. Commissions paid to independent distributors on
personal purchases are considered a sales discount and are reported as a
reduction to net revenue. Our global sales compensation plan is an important
factor in our ability to attract and retain our independent distributors. Under
our global sales compensation plan, independent distributors can earn
commissions for product sales to their customers as well as the product sales
made through the sales networks they have developed and trained. We do not pay
commissions on marketing materials that are sold to our independent
distributors. Commissions and incentives expenses, as a percentage of net
revenue, may be impacted by the timing and magnitude of non-commissionable
revenue derived from the sales of marketing materials, event tickets, and
promotional items, investment in our red carpet program, limited-time offers and
the timing, magnitude and number of incentive trips and
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other promotional activities. From time to time, we make modifications and
enhancements to our global sales compensation plan in an effort to help motivate
our sales force and develop leadership characteristics, which can have an impact
on commissions and incentives expenses.
Selling, general and administrative expenses include wages and benefits, stock
compensation expenses, marketing and event costs, professional fees, rents and
utilities, depreciation and amortization, research and development, travel costs
and other operating expenses. Wages and benefits and stock compensation expenses
represent the largest component of selling, general and administrative expenses.
Marketing and event costs include costs of distributor conventions and events
held in various markets worldwide, which we expense in the period in which they
are incurred. Marketing and event costs also include expenses associated with
our sponsorship of the Major League Soccer team, Real Salt Lake .
Sales to customers outside the United States are transacted in the respective
local currencies and are translated to U.S. Dollars at weighted-average currency
exchange rates for each monthly accounting period to which they relate.
Consequently, our net sales and earnings are affected by changes in currency
exchange rates. In general, sales and gross profit are affected positively by a
weakening U.S. Dollar and negatively by a strengthening U.S. Dollar. Currency
fluctuations, however, have the opposite effect on our commissions paid to
independent distributors and selling, and general and administrative expenses.
In our revenue discussions that follow, we approximate the impact of currency
fluctuations on revenue by translating current year revenue at the average
exchange rates in effect during the comparable prior year periods.
Results of Operations
For the fiscal years endedJune 30, 2022 , 2021 and 2020, we generated net revenue of$206.4 million ,$220.2 million and$232.9 million , respectively, recognized operating income of$7.6 million ,$17.6 million and$15.5 million , respectively, and recognized net income of$3.1 million ,$12.9 million and$11.5 million , respectively.
The following table presents certain consolidated earnings data as a percentage of net revenue for the years indicated(1):
For the fiscal years ended
2022 2021 2020
Revenue, net 100.0 % 100.0 % 100.0 %
Cost of sales 18.5 17.3 16.3
Gross profit 81.5 82.7 83.7
Operating expenses:
Commissions and incentives 47.1 47.0 47.9
Selling, general and administrative 30.7 27.6 29.2
Total operating expenses 77.8 74.6 77.1
Operating income 3.7 8.1 6.6
Other expense:
Interest expense - - (0.1)
Other expense, net (0.3) (0.2) (0.3)
Impairment of investment (1.1) - -
Total other expense (1.4) (0.2) (0.3)
Income before income taxes 2.3 7.9 6.3
Income tax expense (0.8) (2.0) (1.3)
Net income 1.5 % 5.9 % 5.0 %(1) Certain percentages may not add due to rounding.
Comparison of Fiscal Years Ended
Revenue, net. We generated net revenue of$206.4 million and$220.2 million during the fiscal years endedJune 30, 2022 and 2021, respectively. The overall decrease in revenue is attributed mainly to a reduction of 8.2% in total active accounts during fiscal year 2022. Revenue inthe United States ,Japan ,Canada andEurope declined on a year over year basis, partially offset by increases of 10.7% in ourAustralia and New Zealand market, 18.5% in ourGreater China market, and the addition ofthe Philippines in fiscal year 2022. During the prior year, we launched several limited time and permanent flavors of Axio®, our energy drink mixes, launched our new LifeVantage® Daily Wellness product, and rolled out six new products in our TrueScience® Body & Bath and Targeted Relief product lines and a line extension to our TrueScience® skin care line. During ourOctober 2021 global convention, we launched our new IC Bright® product, and rolled out our TrueScience® Liquid 44 --------------------------------------------------------------------------------
Collagen product during our Activate 2022 event held in
For the fiscal years ended June 30,
2022 2021 % change
United States $ 130,932 $ 144,897 (9.6) %
Other 7,391 9,758 (24.3) %
Americas Total $ 138,323 $ 154,655 (10.6) %
Revenue in the Americas region for the fiscal year ended June 30, 2022 decreased
$16.3 million , or 10.6%, compared to the prior year. Total active accounts
decreased 10.9% in the region compared to the prior fiscal year which drove the
decrease in revenue. We believe that our total active accounts number was
negatively impacted by the COVID-19 global pandemic as we were unable to hold
some of our in-person training events and our independent distributors were not
able to conduct in person opportunity and training meetings as frequently as
they had before COVID-19. We launched several new products during fiscal year
2022, both during our October 2021 global convention and our Activate 2022
convention held in June 2022 . As a result of these launches and continued
efforts from our distributors and employees, we hope to see revenue growth in
the Americas region in the upcoming fiscal year.
Asia/Pacific & Europe . The following table sets forth revenue for the fiscal
years ended June 30, 2022 and 2021 for the Asia/Pacific & Europe region and its
principal markets (in thousands):
For the fiscal years ended June 30,
2022 2021 % change
Japan $ 36,810 $ 41,173 (10.6) %
Australia & New Zealand 12,280 11,095 10.7 %
Greater China 5,655 4,771 18.5 %
Other 13,292 8,487 56.6 %
Asia/Pacific & Europe Total $ 68,037 $ 65,526 3.8 %
Revenue in the Asia/Pacific and Europe region for the fiscal year ended June 30,
2022 increased $2.5 million , or 3.8%, compared to the prior year. Revenue in the
region was negatively impacted approximately $4.6 million , or 7.1%, by foreign
currency exchange rate fluctuations.
Revenue in our Japan market decreased 10.6% year over year on a U.S. Dollar
basis and 0.7% on a constant currency basis. During the fiscal year ended
June 30, 2022 , the Japanese yen, on average, weakened against the U.S. Dollar,
negatively impacting our revenue in this market by $3.7 million or 8.9%. The
decline in revenue related to foreign currency was offset by increase in
revenues in our other markets during the fiscal year ended June 30, 2022 .
Revenue in our Australia and New Zealand markets increased $1.2 million , or
10.7%, during fiscal year 2022. We continue to see synergies between our
Australian and New Zealand independent distributor organizations and customer
bases, increasing our ability to attract experienced direct selling leaders and
further driving the growth within the region.
Revenue in our
Revenue in ourPhilippines market was$4.1 million during fiscal year 2022. This market launched inNovember 2021 and has seen increase revenues during each month since inception. Revenue inThailand has grown year over year due to increases in active independent distributors.Europe remained stable during the fiscal year 2022 relative to the prior year.
Overall, we are encouraged with our increase in total active distributor
accounts in our
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Globally, our sales and marketing efforts continue to be directed toward
strengthening our core business through our fiscal year initiatives and building
our worldwide sales. During fiscal year 2022,we successfully launched two new
products, completed a full on the ground launch of the Philippines . In October
2021 , we held our global convention, our first major event with in person
attendance since the start of the COVID-19 global pandemic and held several
others throughout fiscal year 2022. We continued the refinement and expansion of
our product offerings internationally during fiscal year 2022 and have plans for
continued product expansion in fiscal year 2023 and beyond. We expect this
expansion will continue to 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.
During fiscal year 2023, our main focus will be to increase our average account
base through concentrating our efforts on the enrollment of new independent
distributors, who will in turn help grow the business through incremental
product sales, and on increasing the number of accounts that place an order in
the month following their initial enrollment. We will continue investing in our
red carpet program, which we believe has increased our ability to attract and
retain strong distributor leadership and is a significant opportunity to drive
revenue growth throughout our markets. We remain committed to further expanding
the functionality and availability of our mobile application, which we believe
will aid independent distributors in initiating and expanding their businesses.
Gross Margin. Cost of sales were $38.1 million for the fiscal year ended
June 30, 2022 , and $38.2 million for the fiscal year ended June 30, 2021 ,
resulting in a gross margin of $168.3 million , or 81.5%, and $182.0 million , or
82.7%, respectively. The decrease in gross margin as a percentage of revenue is
primarily due to increased raw material and manufacturing related costs,
inventory obsolescence costs and shipping to customer expenses during the
current fiscal year.
Commissions and Incentives. Commissions and incentives expenses for the fiscal
year ended June 30, 2022 were $97.3 million or 47.1% of revenue compared to
$103.5 million or 47.0% of revenue for the fiscal year ended June 30, 2021 . The
decrease of $6.2 million in fiscal year 2022 was due to the decrease in revenue.
Commissions and incentives expenses as a percentage of revenue increased
slightly during the comparable periods due the continued refinement and the
timing and magnitude of our various promotional and incentive programs during
the year.
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 for the fiscal year ended June 30, 2022 were $63.4 million or 30.7% of
revenue compared to $60.8 million or 27.6% of revenue for the fiscal year ended
June 30, 2021 . The increase in selling, general, and administrative expenses as
a percentage of revenue during the current fiscal year primarily was due to the
decrease in revenue and increased events and travel expenses as a result of
changes to our event schedule and the easing of COVID-19 related travel and
associated group meeting restrictions. These increases were partially offset
from a decrease in incentive compensation during the year and decreased
executive severance and transition expenses.
Primary factors that may cause our selling, general and administrative expenses
to fluctuate in the future include changes in the number of employees, the
timing and number of events we hold, marketing and branding initiatives and
costs related to legal matters, if and as they arise. A fluctuation in our stock
price may also impact our share-based compensation expense recorded for equity
awards made in future years.
Interest Expense. Interest expense for the fiscal year ended
Other Expense, Net. We recognized other expense, net, for the fiscal year endedJune 30, 2022 of$0.7 million as compared to$0.4 million for the fiscal year endedJune 30, 2021 . The increase of$0.3 million was primarily due to the impact of foreign currency fluctuations recognized during fiscal year 2022. Impairment of Investment. We recognized an impairment of$2.2 million on our investment inGig Economy Group ("GEG") during fiscal year 2022 as we determined our investment in GEG had declined significantly as a result of the business failing to achieve profitability due to weak market conditions for its products. Income Tax Expense. Our income tax expense for the fiscal year endedJune 30, 2022 was$1.6 million as compared to income tax expense of$4.3 million for the fiscal year endedJune 30, 2021 . The effective tax rate was 33.5% of pre-tax income for the fiscal year endedJune 30, 2022 , compared to 25.2% for the fiscal year endedJune 30, 2021 . The increase in the effective tax rate for fiscal year 2022 compared to the prior year is mainly due to the change in valuation allowance on the impairment of GEG investment. 46 -------------------------------------------------------------------------------- Our provision for income taxes for the fiscal year endedJune 30, 2022 consisted primarily of federal, state, and foreign tax on anticipated fiscal year 2022 income which was partially offset by tax benefits. We expect our effective rate to fluctuate in future periods based on the impact of permanent items in relation to pre-tax income. Net Income. As a result of the foregoing factors, net income for the fiscal year endedJune 30, 2022 decreased to$3.1 million compared to$12.9 million for the fiscal year endedJune 30, 2021 .
Comparison of Fiscal Years Ended
For a discussion of our results of operations for the fiscal year 2021 compared with fiscal year 2020, refer to "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the fiscal year endedJune 30, 2021 , as filed with theSEC onAugust 19, 2021 .
Liquidity and Capital Resources
Liquidity
Our primary liquidity and capital resource requirements are to service our debt, which includes any outstanding balances under the 2016 Credit Facility, and finance the cost of our planned operating expenses and working capital (principally inventory purchases), as well as capital expenditures. 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.
At
During the fiscal year endedJune 30, 2022 , our net cash provided by operating activities was$8.0 million as compared to net cash provided by operating activities of$16.3 million during the fiscal year endedJune 30, 2021 . The decrease in cash provided by operating activities during the fiscal year endedJune 30, 2022 primarily was due to decreases in net income and increases in prepaid expenses, offset by the impairment of our investment in GEG and increases in accounts payable. During the fiscal year endedJune 30, 2022 , our net cash used in investing activities was$1.5 million , as a result of the purchase of fixed assets. During the fiscal year endedJune 30, 2021 , our net cash used in investing activities was$3.7 million , as a result of the purchase of fixed assets. Cash used in financing activities during the fiscal year endedJune 30, 2022 was$9.0 million , as a result of the repurchase of company stock, the payment of a cash dividend and shares purchased as payment of tax withholding upon vesting of employee equity awards, partially offset by proceeds from stock option exercises and proceeds from purchases of company stock under our employee stock purchase plan. Cash used in financing activities during the fiscal year endedJune 30, 2021 was$11.5 million , as a result of the repurchase of company stock and shares purchased as payment of tax withholding upon vesting of employee equity awards, partially offset by proceeds from stock option exercises and proceeds from purchases of company stock under our employee stock purchase plan. AtJune 30, 2022 and 2021, the total amount of our foreign subsidiary cash was$7.0 million and$9.2 million , respectively. Under currentU.S. tax law, in the future, if needed, we expect to be able to repatriate cash from foreign subsidiaries without paying additionalU.S. taxes. AtJune 30, 2022 , we had working capital (current assets minus current liabilities) of$21.2 million compared to working capital of$22.9 million atJune 30, 2021 . The decrease in working capital primarily was due to decreases in cash offset slightly by increases in accounts receivable and prepaid expenses. 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. 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 debt markets and repurchase our equity securities without prior approval from the lender. Additionally, our credit facility 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.
Capital Resources
Shelf Registration Statement
OnMarch 24, 2020 , we filed a shelf registration statement (the "Shelf Registration") on Form S-3 with theSEC that was declared effectiveApril 3, 2020 , which permits us to offer up to$75 million of common stock, preferred stock, debt securities 47 -------------------------------------------------------------------------------- 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
OnMarch 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 million plus accrued interest beginning with the fiscal quarter endedJune 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. OnMay 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 fromMarch 30, 2019 toMarch 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. 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, as amended, exceeds$2.0 million , we must prepay an amount equal to such excess. Any principal amount of the 2016 Term Loan, as amended, which is prepaid or repaid may not be re-borrowed. OnFebruary 1, 2019 , we entered into a loan modification agreement, which amended the 2016 Credit Facility, as amended ("Amendment No. 2"). Under Amendment No. 2, we 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 . OnApril 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 fromMarch 31, 2021 toMarch 31, 2024 and modified the variable interest rate based on the one-monthUnited States Treasury Rate, plus a margin of 3.00%, with an interest rate floor of 4.00%. As ofJune 30, 2021 , the effective interest rate is 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 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. InMay 2022 , we received consent from our lender to pay out the quarterly cash dividend of$0.03 per common share to our stockholders. 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:
•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;
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•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 ofJune 30, 2022 , we were not in compliance with the financial covenant related to the minimum fixed charge coverage ratio under the 2016 Credit Facility, as amended. As ofJune 30, 2022 , there was no balance outstanding on this credit facility, We have requested, and were granted, a waiver related to this covenant violation as ofJune 30, 2022 . We are in the process of renegotiating the terms of the amended 2016 Credit Facility and expect that a revised loan agreement will be in place in the first quarter of fiscal 2023. During the fiscal year endedJune 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 (1)
15,920 - - -
Total $ 34,380 $ 19,289 $ 3,635 $ 3,333 $ 8,123 (1) Operating lease obligations include current and future obligations associated with
corporate office leases. (2) Other operating obligations represent contractual obligations primarily related to
marketing and sponsorship commitments and purchases of inventory.
Off-Balance Sheet Arrangements
At
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted inthe 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 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 ofJune 30, 2022 , our shipments of products sold totaling approximately$18.5 million were subject to our 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$0.1 million atJune 30, 2022 , compared with$0.2 million atJune 30, 2021 . To date, product 49 --------------------------------------------------------------------------------
expiration dates have not played any role in product returns, and we do not expect 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 estimated net realizable value. Factors utilized in the determination of estimated 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 fiscal years endedJune 30, 2022 and 2021, we recognized expenses of$1.5 million and$0.4 million , respectively, related to obsolete and slow-moving inventory. 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 we expect to be entitled to in exchange for those goods or services. Sales, value add, and other taxes that we collect concurrent with revenue-producing activities are excluded from revenue.
Stock-Based Compensation
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.
Recently Issued Accounting Standards
Refer to "Item 8. Financial Statements and Supplementary Data" and Note 2 to our consolidated financial statements included in Part IV, Item 15 of this report for discussion regarding the impact of accounting standards that were recently issued but not yet effective, on our consolidated financial statements.
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