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LIFEVANTAGE CORPORATION

(LFVN)
  Report
Delayed Nasdaq  -  04:00 2022-09-30 pm EDT
3.750 USD   -0.79%
09/19LifeVantage Corporation(NasdaqCM:LFVN) dropped from S&P Global BMI Index
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09/10Lifevantage : Investor Presentation September 2022
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LIFEVANTAGE CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/03/2022 | 04:08pm EDT

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 the Americas
region and the Asia/Pacific & Europe region.

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.

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As a result, it is vital to our success that we leverage our product development
resources to develop and introduce compelling and innovative products and
provide opportunities for our independent distributors to sell these products in
a variety of markets. We sell our products in the United States, Mexico, Japan,
Australia, Hong Kong, Canada, Thailand, the United Kingdom, the Netherlands,
Germany, Taiwan, Austria, Spain, Ireland, Belgium, New Zealand, Singapore, and
the Philippines. In addition, we sell our products in a number of countries to
customers for personal consumption only and in China through a China 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 an outbreak of a new strain of coronavirus ("COVID-19")
has resulted, and is likely to continue to result, in significant national and
global economic disruption and may adversely affect our business. Uncertainty
exists concerning the magnitude of the impact and duration of the COVID-19
pandemic. As of the date of this filing, we have experienced moderate
disruptions at the corporate level as we have transitioned our corporate
workforce to a hybrid working environment, temporarily closed some of our
showrooms and will call locations in international markets and cancelled
multiple planned events in order to comply with group meeting restrictions. Our
independent distributors have also experienced disruptions. Specifically, in
Japan, independent distributors are required to provide a hard-copy introductory
packet (gaiyoshomen) in person to each person they approach to sponsor as an
independent distributor before presenting our products and business opportunity.
This requirement inhibits independent distributors from connecting with
potential new independent distributors virtually or through social media.
Accordingly, quarantines, avoidance of public places and general concerns about
physical distancing related to COVID-19 or otherwise can significantly reduce
the ability for independent distributors to meet people in person and commence
the enrollment process. Elsewhere, our independent distributors have begun to
adapt their approach for customer outreach and enrollment, including
transitioning to a stronger social media presence, in an effort to sustain their
sales volume. Our business may, in the future, experience additional disruptions
and be negatively impacted by the COVID-19 pandemic, including as a result of
limitations on the ability of our suppliers to manufacture, or procure from
manufacturers, the products we sell or any of the raw materials or components
required in the production process, or to meet delivery requirements and
commitments; limitations on the ability of our employees to perform their work
due to illness caused by the pandemic or local, state, or federal orders
requiring employees to remain at home; limitations on the ability of carriers to
deliver our products to customers; limitations on the ability of our independent
distributors to conduct their businesses and purchase our products; and
limitations on the ability of our independent distributors or customers to
continue to purchase our products due to decreased disposable income.

We have made modifications, and are evaluating additional potential
modifications that may be needed, to protect our supply chain and preserve
adequate liquidity to ensure that our business can continue to operate during
this uncertain time. Some states have issued executive orders requiring all
workers to remain at home, unless their work is critical, essential, or
life-sustaining. Near the end of fiscal 2020 we transitioned all of our
corporate employees to a work from home model and beginning July 2021 we
transitioned our workforce to a hybrid model whereby employees work certain days
of the week in the office and other days have the option to work from home or in
the office. To date, our employees are performing and adapting well with the
evolving environment. With respect to liquidity, we are evaluating and taking
actions to ensure that we continue to responsibly manage expenses across our
organization.

While we are unable to determine or predict the nature, duration or scope of the
overall impact that the COVID-19 pandemic will have on our business, results of
operations, liquidity or capital resources, we will continue to actively monitor
the situation and may take further actions that alter our business operations as
may be required by federal, state or local authorities or that we determine are
in the best interests of our employees, independent distributors, customers, and
stockholders.

Our Products

Our products include the Protandim® line of scientifically-validated dietary
supplements, LifeVantage® Omega+™, ProBio™, IC Bright™, and Daily Wellness™
dietary supplements, TrueScience®, our line of skin, bath & body, target relief,
and hair care products, Petandim®, our companion pet supplement formulated to
combat oxidative stress in dogs, Axio®, our nootropic energy drink mixes, and
PhysIQ™, our smart weight management system. The Protandim® product line
includes Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, and
Protandim® NAD Synergizer®. The Protandim® NRF1 Synergizer® is formulated to
increase cellular energy and performance by boosting mitochondria production to
improve cellular repair and slow cellular aging. The Protandim® Nrf2 Synergizer®
contains a proprietary blend of ingredients and has been shown to combat
oxidative stress and enhance energy production by increasing the body's natural
antioxidant protection at the genetic level, inducing the production of
naturally-occurring protective antioxidant enzymes, including superoxide
dismutase, catalase, and glutathione synthase. The Protandim® NAD Synergizer®
was specifically formulated to target cell signaling pathways involved in the
synthesis and recycling of a specific molecule called NAD (nicotinamide adenine
dinucleotide), and has been shown to double sirtuin activity, supporting
increased health, focus, energy, mental clarity and mood. Use of the three

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Protandim® products together has been shown to produce synergistic benefits
greater than using the single products on their own. LifeVantage® Omega+™ is a
dietary supplement that combines DHA and EPA 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®
IC Bright™ combines macular carotenoids with vitamins and key ingredients that
effectively support eye and brain health. LifeVantage® Daily Wellness™ is a
dietary supplement designed to support and strengthen immune health. Our
TrueScience® line of anti-aging skin and hair care, and CBD Nrf2 enhanced, bath
& body, targeted relief products includes TrueScience® Facial Cleanser,
TrueScience® Perfecting Lotion, TrueScience® Eye Serum, TrueScience® Anti-Aging
Cream, TrueScience® Beauty Serum, TrueScience® Hand Cream, TrueScience®
Invigorating Shampoo, TrueScience® Nourishing Conditioner, TrueScience® Scalp
Serum, TrueScience® Body Lotion, TrueScience® Body Wash, TrueScience® Body
Butter, TrueScience® Deodorant, TrueScience® Soothing Balm, and TrueScience®
Body Rub. Petandim® is a supplement specially formulated to combat oxidative
stress in dogs through Nrf2 activation. Axio® is our line of our nootropic
energy drink mixes formulated to promote alertness and support mental
performance. PhysIQ™ is our smart weight management system, which includes
PhysIQ™ Fat Burn, PhysIQ™ Prebiotic and PhysIQ™ Whey Protein, all formulated to
aid in weight management.

We sell our products both individually and in stacks. A stack consists of
multiple products bundled together that are designed to achieve a specific
result. By studying the effects of nutrients and natural compounds, we have
developed scientifically-backed nutrigenomics products that promote healthy
aging on the cellular level. By stacking these products together, we have
created a foundation for synergy from nutrigenomic products to promote a
healthier life. The Vitality Stack™ includes four of our nutrigenomics products
- Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, LifeVantage® Omega+™
and LifeVantage® ProBio. This product stack was designed to provide a foundation
for wellness, supporting healthy organs, including the brain, heart, eyes, and
other vitals. With the Ultimate Stack™, we added Protandim® NAD Synergizer® and
PhysIQ™ Prebiotic to our Vitality Stack™ to support gut health and increase
sirtuin activity, supporting increased health, focus, energy, mental clarity and
mood. The Protandim® Tri-Synergizer™ consists of our Protandim® NRF1
Synergizer®, Protandim® Nrf2 Synergizer® and Protandim® NAD Synergizer®, and was
designed to effectively and synergistically reduce oxidative stress, support
mitochondria function, increase sirtuin activity, and target cell signaling
pathways to fight the effects of aging. We also offer stacks that directly
support the following consumer needs: immune support, heart health, energy,
well-being, eye health, cognition and memory, metabolism, gut health, skin care,
and hair care.

We currently have additional products in development. Any delays or difficulties
in introducing compelling products or attractive initiatives or tools into our
markets may have a negative impact on our revenue and our ability to attract new
independent distributors and customers.

Accounts


Because we utilize a direct selling model for the distribution of a majority of
our products, the success and growth of our business is primarily based on the
effectiveness of our independent distributors to attract customers and sell our
products and our ability to attract new and retain existing independent
distributors. Changes in our product sales typically are the result of
variations in product sales volume relating to fluctuations in the number of
active independent distributors and customers purchasing our products. The
number of active independent distributors and customers is, therefore, used by
management as a key non-financial measure.

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The following tables summarize the changes in our active accounts base by
geographic region. These numbers have been rounded to the nearest thousand as of
the dates indicated. For purposes of this report, we define "Active Accounts" as
only those independent distributors and customers who have purchased from us at
any time during the most recent three-month period, either for personal use or
for resale.
                                                                  As of March 31,
                                                                                                                            Change from Prior
                                                  2022                                          2021                               Year               Percent Change
Active Independent Distributors
  Americas                                   38,000               61.3  %               42,000               66.7  %                 (4,000)                  (9.5) %
  Asia/Pacific & Europe                      24,000               38.7  %               21,000               33.3  %                  3,000                   14.3  %
    Total Active Independent
Distributors                                 62,000              100.0  %               63,000              100.0  %                 (1,000)                  (1.6) %

Active Customers
  Americas                                   70,000               73.7  %               79,000               75.2  %                 (9,000)                 (11.4) %
  Asia/Pacific & Europe                      25,000               26.3  %               26,000               24.8  %                 (1,000)                  (3.8) %
    Total Active Customers                   95,000              100.0  %              105,000              100.0  %                (10,000)                  (9.5) %

Active Accounts
  Americas                                  108,000               68.8  %              121,000               72.0  %                (13,000)                 (10.7) %
  Asia/Pacific & Europe                      49,000               31.2  %               47,000               28.0  %                  2,000                    4.3  %
    Total Active Accounts                   157,000              100.0  %              168,000              100.0  %                (11,000)                  (6.5) %



Results of Operations

Three and Nine Months ended March 31, 2022 and 2021


Revenue. We generated net revenue of $50.0 million and $51.6 million during the
three months ended March 31, 2022 and 2021, respectively. We generated net
revenue of $155.4 million and $165.4 million during the nine months ended March
31, 2022 and 2021, respectively. Foreign currency fluctuations negatively
impacted our revenue $1.2 million or 2.4% and $2.4 million or 1.4% during the
three and nine months ended March 31, 2022, respectively.

Americas. The following table sets forth revenue for the three and nine months ended March 31, 2022 and 2021 for the Americas region (in thousands):

                                 Three Months Ended March 31,                                   Nine Months Ended March 31,
                                    2022              2021               % Change                 2022                  2021               % Change
United States                   $  31,674          $ 34,068                   (7.0) %       $       98,868          $ 109,593                   (9.8) %
Other                               1,770             2,353                  (24.8) %                5,732              7,386                  (22.4) %
Americas Total                  $  33,444          $ 36,421                   (8.2) %       $      104,600          $ 116,979                  (10.6) %


Revenue in the Americas region for the three and nine months ended March 31,
2022 and 2021, decreased $3.0 million or 8.2% and $12.4 million or 10.6%,
respectively, from the prior year periods. Total Active Accounts decreased by
10.7% in the region compared to the prior year period which drove the decrease
in revenue. Our Independent Distributors have been forced to continually adapt
to the changing business and social environments due to the COVID-19 pandemic.
We remain committed to providing digital tools and support to our distributors
to help them grow their businesses despite difficulties with in person meetings
and events and are rolling out new hybrid in person and virtual meeting
opportunities to provide better training and business support to our
distributors.

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Asia/Pacific & Europe. The following table sets forth revenue for the three and
nine months ended March 31, 2022 and 2021 for the Asia/Pacific & Europe region
and its principal markets (in thousands):
                                     Three Months Ended March 31,                                   Nine Months Ended March 31,
                                        2022              2021               % Change                 2022                 2021               % Change
Japan                               $   8,724          $  9,622                   (9.3) %       $       28,558          $ 31,172                   (8.4) %
Australia & New Zealand                 2,941             2,808                    4.7  %                9,840             7,791                   26.3  %
Greater China                           1,099               881                   24.7  %                3,894             3,178                   22.5  %
Other                                   3,796             1,838                  106.5  %                8,526             6,285                   35.7  %
Asia/Pacific & Europe Total         $  16,560          $ 15,149                    9.3  %       $       50,818          $ 48,426                    4.9 

%



Revenue in the Asia/Pacific & Europe region increased $1.4 million or 9.3% and
$2.4 million or 4.9% for the three and nine months ended March 31, 2022 and
2021, respectively, as compared to the prior year periods. Active Accounts in
the region increased 4.3% compared to the prior year period. We continue to be
encouraged by the results we are seeing in our Australia and New Zealand region
due to continued distributor leadership development and advancement within the
region. The launch of Philippines has also shown encouraging results. Japan
revenues continue to be down as compared to the prior year period due to
continued restrictions in place for in person meetings and recruiting due to the
COVID-19 pandemic and impacts from foreign currency exchange rate fluctuations.

Overall, revenue in the Asia/Pacific & Europe region was negatively impacted by
foreign currency exchange rate fluctuations in the amount of approximately $1.2
million or 8.1% and $2.5 million or 5.3% during the three and nine months ended
March 31, 2022, respectively, as compared to the prior year periods, mainly due
to currency fluctuations in Japan, partially offset by currency benefits in
other markets within the region. Revenue in Japan was negatively impacted by
foreign exchange rate fluctuations in the amount of approximately $0.8 million
or 8.8% and $2.1 million or 6.8%, during the three and nine months ended
March 31, 2022, respectively, as compared to the prior year periods. On a
constant currency basis, revenue in Japan increased 0.1% and decreased 0.3% for
the three and nine months ended March 31, 2022 and 2021, respectively, as
compared to the prior year periods.

Globally, our sales and marketing efforts continue to be directed toward
strengthening our core business through our fiscal year initiatives and building
our worldwide revenue. In October 2021, we held our first major event with both
in person and virtual attendance options since the start of the COVID-19 global
pandemic and we plan to hold additional in person meetings throughout the year
as we are able. During our October 2021 global convention, we launched our new
LifeVantage® IC Bright™ eye health product and have plans for both continued
product expansion and future market expansion during the remaining fiscal 2022.
We expect this launch and other continued expansion will drive revenue growth
globally through increased average order size and increased ability to attract
and retain new independent distributors and customers with a compelling product
lineup.

Gross Margin. Our gross profit percentage for the three months ended March 31,
2022 and 2021 was 80.7% and 82.9%, respectively. Our gross profit percentage for
the nine months ended March 31, 2022 and 2021 was 81.5% and 82.8%, respectively.
The decrease in gross margins, as compared to the prior year periods, is
primarily due to increased inventory obsolescence expenses and increased
shipping to customer expenses during the current year period as well as shifts
in geographic and product sales mix.

Commissions and Incentives. Commissions and incentives expenses during the three
months ended March 31, 2022 were $23.2 million or 46.4% of revenue as compared
to $25.2 million or 48.8% of revenue for the three months ended March 31, 2021.
Commissions and incentives expenses during the nine months ended March 31, 2022
were $72.8 million or 46.8% of revenue as compared to $77.9 million or 47.1% of
revenue for the nine months ended March 31, 2021. The decrease in commissions
and incentives expenses as a percentage of revenue as compared to the prior
periods is due mainly to the timing and magnitude of our various promotional and
incentive programs. Commissions and incentives expenses, as a percentage of
revenue, may fluctuate in future periods based on ability to hold incentive
trips and events and the timing and magnitude of compensation, incentive and
promotional programs.

Selling, General and Administrative. Selling, general and administrative
expenses during the three months ended March 31, 2022 were $15.3 million or
30.6% of revenue as compared to $15.5 million or 30.1% of revenue for the three
months ended March 31, 2021. Selling, general and administrative expenses during
the nine months ended March 31, 2022 were $47.8 million or 30.8% of revenue as
compared to $48.0 million or 29.0% of revenue for the nine months ended March
31, 2021. The increase in selling, general and administrative expenses as a
percentage of revenue during the three and nine months ended March 31, 2022
compared to the prior year periods is primarily due to increased event and
travel expenses as restrictions related

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to the COVID-19 pandemic have begun to ease as well as increased legal expenses. These increases were offset slightly by decreases in salaries and wages and other employee related expenses.

We expect selling, general and administrative expenses, as a percent of revenue, to remain steady during the remainder of the fiscal year.


Total Other Expense. During the three months ended March 31, 2022 we recognized
total net other expense of $0.1 million as compared to $0.3 million for the
three months ended March 31, 2021. During the nine months ended March 31, 2022,
we recognized total net other expense of $0.4 million as compared to $0.3
million for the nine months ended March 31, 2021.Total net other expense for the
three and nine months ended March 31, 2022 and 2021 consisted primarily of
foreign currency losses and interest expense.

Income Tax Expense. We recognized income tax expense of $0.6 million and $1.1
million, respectively, for the three and nine months ended March 31, 2022, as
compared to income tax expense of $0.1 million and $2.8 million, respectively,
for the three and nine months ended March 31, 2021.

The effective tax rate was 20.2% of pre-tax income during the nine months ended
March 31, 2022, compared to 25.7% for the prior year period. The change in the
tax rate for the nine months ended March 31, 2022 was mainly due to a change in
estimate in our calculations of foreign-derived intangible income ("FDII") and
foreign tax credits ("FTC"). The specific allocation of costs attributable
foreign and domestic income led to an increase in the FDII deduction as well as
the FTC limitation.

We expect that our effective tax rate will fluctuate slightly during the
remainder of fiscal 2022 as the impact of discrete items and other permanent
differences are recognized during the year; however, our tax rate can be
impacted by various book to tax differences and fluctuations in our stock price
that occur during the year which are difficult to forecast.

Liquidity and Capital Resources

Liquidity


Our primary liquidity and capital resource requirements are to finance the cost
of our planned operating expenses and working capital (principally inventory
purchases), fund capital expenditures, and service our debt, which includes any
outstanding balances under the 2016 Credit Facility. We have generally relied on
cash flow from operations to fund operating activities and we have, at times,
incurred long-term debt in order to fund stock repurchases and strategic
transactions.

As of March 31, 2022, our available liquidity was $17.8 million, which consisted of available cash and cash equivalents. This represents a decrease of $5.4 million from the $23.2 million in cash and cash equivalents as of June 30, 2021.


During the nine months ended March 31, 2022, our net cash provided by operating
activities was $5.2 million as compared to our net cash provided by operating
activities of $7.9 million during the nine months ended March 31, 2021.

During the nine months ended March 31, 2022, our net cash used in investing
activities was $1.3 million, as a result of the purchase of fixed assets. During
the nine months ended March 31, 2021, our net cash used in investing activities
was $3.3 million, as a result of the purchase of fixed assets.

Cash used in financing activities during the nine months ended March 31, 2022
was $8.1 million as a result of our repurchase of common stock and shares
purchased as payment of tax withholding upon vesting of equity awards, partially
offset by proceeds from stock issued under our employee stock purchase plan and
stock option exercises. Cash used in financing activities during the nine months
ended March 31, 2021 was $7.8 million as a result of our repurchase of common
stock, and shares purchased as payment of tax withholding upon vesting of equity
awards, partially offset by proceeds from stock issued under our employee stock
purchase plan and stock option exercises.

At March 31, 2022 and June 30, 2021, the total amount of our foreign subsidiary
cash was $8.9 million and $8.8 million, respectively. The federal tax reform
legislation that was passed into law during December 2017 enacted a 100%
dividend deduction for > 10% owned foreign corporations. Therefore, in the
future, if needed, we expect to be able to repatriate cash from foreign
subsidiaries without paying additional U.S. taxes.

At March 31, 2022, we had working capital (current assets minus current
liabilities) of $21.5 million, compared to working capital of $22.9 million at
June 30, 2021. We believe that our cash and cash equivalents balances and our
ongoing cash flow from operations will be sufficient to satisfy our cash
requirements for at least the next 12 months. The majority of our historical
expenses have been variable in nature and as such, a potential reduction in the
level of revenue would reduce our cash flow needs. In the event that our current
cash balances and future cash flow from operations are not sufficient to meet
our obligations or strategic needs, we would consider raising additional funds,
which may not be available on terms that are acceptable to us, or at all. Our
credit facility, however, contains covenants that restrict our ability to raise
additional funds in the

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debt markets and repurchase our equity securities without prior approval from
the lender. Additionally, our credit facility, as amended, provides for a
revolving loan facility in an aggregate principal amount up to $5.0 million. We
would also consider realigning our strategic plans including a reduction in
capital spending and expenses.

Capital Resources

Shelf Registration Statement


On March 24, 2020, we filed a shelf registration statement (the "Shelf
Registration") on Form S-3 with the SEC that was declared effective April 3,
2020, which permits us to offer up to $75 million of common stock, preferred
stock, debt securities and warrants in one or more offerings and in any
combination, including in units from time to time. Our Shelf Registration is
intended to provide us with additional flexibility to access capital markets for
general corporate purposes, which may include, among other purposes, working
capital, capital expenditures, other corporate expenses and acquisitions of
assets, licenses, products, technologies or businesses.

2016 Credit Facility


On March 30, 2016, we entered into a loan agreement (the "2016 Loan Agreement")
to refinance our outstanding debt. In connection with the 2016 Loan Agreement
and on the same date, we entered into a security agreement (the "Security
Agreement"). The 2016 Loan Agreement provides for a term loan in an aggregate
principal amount of $10.0 million (the "2016 Term Loan") and a revolving loan
facility in an aggregate principal amount not to exceed $2.0 million (the "2016
Revolving Loan," and collectively with the 2016 Term Loan, the 2016 Loan
Agreement and the Security Agreement, the "2016 Credit Facility").

The principal amount of the 2016 Term Loan was payable in consecutive quarterly
installments in the amount of $0.5 million plus accrued interest beginning with
the fiscal quarter ended June 30, 2016. If we borrow under the 2016 Revolving
Loan, interest will be payable quarterly in arrears on the last day of each
fiscal quarter.

On May 4, 2018, we entered into a loan modification agreement, which amended the
2016 Credit Facility ("Amendment No. 1"). Amendment No. 1 revised the maturity
date from March 30, 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.

On February 1, 2019, we entered into a loan modification agreement, which
further amended the 2016 Credit Facility ("Amendment No. 2"). Under Amendment
No. 2, we made a principal payment of $2.0 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, we entered into a loan modification agreement ("Amendment No.
3"), which amended the 2016 Credit Facility, as previously amended. Amendment
No. 3 revised the maturity date from March 31, 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 we maintain this
ratio not in excess of 2.00 to 1.00, measured as of the end of each fiscal
quarter, and revised the definition and calculation of the minimum fixed charge
coverage ratio (as defined in Amendment No. 3). There were no other changes to
the covenants or revolving loan facility amount as set forth in Amendment No. 2.

The 2016 Credit Facility, as amended, contains customary covenants, including
affirmative and negative covenants that, among other things, restrict our
ability to create certain types of liens, incur additional indebtedness, declare
or pay dividends on or redeem capital stock, make other payments to holders of
our equity interests, make certain investments, purchase or otherwise acquire
all or substantially all the assets or equity interests of other companies, sell
assets or enter into consolidations, mergers or transfers of all or any
substantial part of our assets. As of March 31, 2022, we were in compliance with
all applicable non-financial and restrictive covenants under the 2016 Credit
Facility, as amended.

The 2016 Credit Facility, as amended, also contains various financial covenants
that require us to maintain certain consolidated working capital amounts, total
liabilities to tangible net worth ratios and fixed charge coverage ratios.
Specifically, we must:

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•Maintain a minimum fixed charge coverage ratio (as defined in the 2016 Loan Agreement, as amended) of at least 1.10 to 1.00 at the end of each fiscal quarter, measured on a trailing twelve month basis;

•Maintain minimum consolidated working capital (as defined in the 2016 Loan Agreement, as amended) at the end of each fiscal quarter of at least $6.0 million; and


•Maintain a ratio of debt (total liabilities) to tangible net worth (as defined
in the 2016 Loan Agreement, as amended) of not greater than 2.00 to 1.00 at the
end of each quarter, measured on a trailing twelve month basis.

As of March 31, 2022, we were in compliance with all applicable financial
covenants under the 2016 Credit Facility, as amended. Additionally, management
anticipates that in the normal course of operations we will be in compliance
with the financial covenants during the ensuing year.

During the fiscal year ended June 30, 2020, we repaid, in full, the remaining
balance of the 2016 Term Loan in accordance with the terms of the 2016 Credit
Facility, as amended.

Commitments and Obligations

The following table summarizes our contractual payment obligations and commitments as of March 31, 2022 (in thousands):

                                                                      Payments due by period
                                                    Less than
Contractual Obligations                Total         1 year        1-3 years       3-5 years       Thereafter

Operating lease obligations $ 19,293 $ 3,354 $ 4,077 $ 3,312 $ 8,550


Other operating obligations (1)        19,370         19,370               -               -                -
Total                                $ 38,663      $  22,724      $    4,077      $    3,312      $     8,550

(1) Other operating obligations represent contractual obligations primarily related to marketing and sponsorship commitments and purchases of inventory.

Off-Balance Sheet Arrangements

As of March 31, 2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies


We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. As such, we are required to
make certain estimates, judgments, and assumptions that we believe are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
periods presented. Actual results could differ from these estimates. Our
significant accounting policies are described in Note 2 to our unaudited
condensed consolidated financial statements. Certain of these significant
accounting policies require us to make difficult, subjective, or complex
judgments or estimates. We consider an accounting estimate to be critical if
(1) the accounting estimate requires us to make assumptions about matters that
were highly uncertain at the time the accounting estimate was made, and
(2) changes in the estimate that are reasonably likely to occur from period to
period, or use of different estimates that we reasonably could have used in the
current period, would have a material impact on our financial condition or
results of operations.

There are other items within our financial statements that require estimation,
but are not deemed critical as defined above. Changes in estimates used in these
and other items could have a material impact on our financial statements.
Management has discussed the development and selection of these critical
accounting estimates with our board of directors, and the audit committee has
reviewed the disclosures noted below.

Allowances for Product Returns


We record allowances for product returns at the time we ship the product based
on estimated return rates. Subject to some exceptions based on local
regulations, our return policy is to provide a full refund for product returned
within 30 days. After 30 days of purchase, only unopened product that is in a
resalable and restockable condition may be returned within twelve months of
purchase and shall receive a 100% refund, less a 10% handling and restocking fee
and any shipping and handling costs. As of March 31, 2022, our shipments of
products sold totaling approximately $17.6 million were subject to the return
policy.

We monitor our product returns estimate on an ongoing basis and revise the allowances to reflect our experience. Our allowance for product returns was $0.1 million at March 31, 2022, compared with $0.2 million at June 30, 2021. To date,

                                       27
--------------------------------------------------------------------------------

product expiration dates have not played any role in product returns, and we do
not expect that they will in the future as it is unlikely that we will ship
product with an expiration date earlier than the latest allowable product return
date.

Inventory Valuation

We value our inventory at the lower of cost or net realizable value on a
first-in first-out basis. Accordingly, we reduce our inventories for the
diminution of value resulting from product obsolescence, damage or other issues
affecting marketability equal to the difference between the cost of the
inventory and its net realizable value. Factors utilized in the determination of
net realizable value include: (i) current sales data and historical return
rates, (ii) estimates of future demand, (iii) competitive pricing pressures,
(iv) new production introductions, (v) product expiration dates, and
(vi) component and packaging obsolescence.

During the three months ended March 31, 2022 and 2021, we recognized expenses of
approximately $0.5 million and $0.2 million, respectively, related to obsolete
and slow-moving inventory. During the nine months ended March 31, 2022 and 2021,
we recognized expenses of approximately $1.0 million and $0.3 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-added, 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.

© Edgar Online, source Glimpses

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