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 biohacking the aging code through 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 and a financially rewarding direct sales opportunity to customers and independent distributors. We engage in the identification, research, development and distribution of advanced nutrigenomic activators, dietary supplements, nootropics, pre- and pro-biotics, weight management, and skin and hair care 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 &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 Protandim®, our line of scientifically-validated dietary supplements, LifeVantage® Omega+ and ProBio dietary supplements, TrueScience®, our line of skin and hair care products, Petandim® for Dogs, 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 compensation plan and other sales initiatives; 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 andNew Zealand . We also sell our products in a number of countries to customers for personal consumption only. In addition, we sell our products inChina through our 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 multiple disruptions at the corporate level as we have transitioned our corporate workforce to a remote working environment, 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, 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 distributors from connecting with potential new distributors virtually or through social 37 -------------------------------------------------------------------------------- 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. We have transitioned all of our corporate employees to a work from home model and, to date, our employees are performing well in the new 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 line of scientifically-validated dietary supplements includes Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, Protandim® NAD Synergizer™, LifeVantage® Omega+ and LifeVantage® ProBio. 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. 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. Our TrueScience® line of anti-aging skin and hair care products includes TrueScience® Facial Cleanser, TrueScience® Perfecting Lotion, TrueScience® Eye Serum, TrueScience® Anti-Aging Cream, TrueScience® Hand Cream, TrueScience® Invigorating Shampoo, TrueScience® Nourishing Conditioner and TrueScience® Scalp Serum. Petandim® for Dogs is a supplement specially formulated to combat oxidative stress in dogs through Nrf2 activation. Axio® is our line of 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. The following table shows revenues by major product line for the fiscal years endedJune 30, 2020 , 2019 and 2018(1): Years ended June 30, 2020 2019 2018 Protandim® product line$ 156,335 67.1 %$ 144,100 63.8 %$ 130,094 64.0 % TrueScience® product line 23,739 10.2 % 24,853 11.0 % 20,881 10.3 % Other 52,841 22.7 % 57,005 25.2 % 52,229 25.7 % Total$ 232,915 100.0 %$ 225,958 100.0 %$ 203,204 100.0 % (1) Certain prior year numbers have been updated to reflect current year product line classification. 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, 2020 and 2018. For the fiscal year endedJune 30, 2019 , Protandim® was the only product line that accounted for more than 10% of total revenue. On a combined basis, these products 38 -------------------------------------------------------------------------------- represent approximately 77.3%, 74.8% and 74.3% of our total net revenue for the fiscal years endedJune 30, 2020 , 2019 and 2018, 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 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 2020 2019 Year Percent Change Active Independent Distributors Americas 49,000 67.1 % 44,000 66.7 % 5,000 11.4 % Asia/Pacific & Europe 24,000 32.9 % 22,000 33.3 % 2,000 9.1 % Total Active Independent Distributors 73,000 100.0 % 66,000 100.0 % 7,000 10.6 % Active Customers Americas 83,000 78.3 % 95,000 79.8 % (12,000) (12.6) % Asia/Pacific & Europe 23,000 21.7 % 24,000 20.2 % (1,000) (4.2) % Total Active Customers 106,000 100.0 % 119,000 100.0 % (13,000) (10.9) % Active Accounts Americas 132,000 73.7 % 139,000 75.1 % (7,000) (5.0) % Asia/Pacific & Europe 47,000 26.3 % 46,000 24.9 % 1,000 2.2 % Total Active Accounts 179,000 100.0 % 185,000 100.0 % (6,000) (3.2) % Income Statement Presentation We report revenue in two geographic regions and we translate revenue from each market's local currency intoU.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, 2020 2019 2018 Americas$ 166,336 71.4 %$ 163,236 72.2 %$ 151,609 74.6 % Asia/Pacific & Europe 66,579 28.6 % 62,722 27.8 % 51,595 25.4 % Total$ 232,915 100.0 %$ 225,958 100.0 %$ 203,204 100.0 % 39
-------------------------------------------------------------------------------- Cost of sales primarily consists of costs of products purchased from and manufactured by third-party vendors, 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, which we employ in all our markets, 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 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 theMajor League Soccer team,Real Salt Lake . Sales to customers outsidethe United States are transacted in the respective local currencies and are translated toU.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 weakeningU.S. Dollar and negatively by a strengtheningU.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, 2020 , 2019 and 2018, we generated net revenue of$232.9 million ,$226.0 million and$203.2 million , respectively, recognized operating profit of$15.5 million ,$9.8 million and$10.3 million , respectively, and recognized net income of$11.5 million ,$7.4 million and$5.8 million , respectively. 40 --------------------------------------------------------------------------------
The following table presents certain consolidated earnings data as a percentage of net revenue for the years indicated(1):
For the fiscal years ended
2020 2019 2018
Revenue, net 100.0 % 100.0 % 100.0 %
Cost of sales 16.3 16.8 17.1
Gross profit 83.7 83.2 82.9
Operating expenses:
Commissions and incentives 47.9 48.1 48.3
Selling, general and administrative 29.2 30.8 29.4
Total operating expenses 77.1 78.9 77.7
Operating income 6.6 4.3 5.2
Other expense:
Interest expense (0.1) (0.2) (0.2)
Other expense, net (0.3) (0.1) (0.2)
Total other expense (0.3) (0.3) (0.4)
Income before income taxes 6.3 4.0 4.8
Income tax expense (1.3) (0.8) (1.9)
Net income 5.0 % 3.2 % 2.9 %(1) Certain percentages may not add due to rounding.
Comparison of Fiscal Years EndedJune 30, 2020 and 2019 Revenue, net. We generated net revenue of$232.9 million and$226.0 million during the fiscal years endedJune 30, 2020 and 2019, respectively. Foreign currency fluctuations positively impacted our net revenue$0.4 million or 0.2%. During fiscal 2020,Australia and New Zealand generated a strong year over year revenue increase of 54.9%, due in part to the successful on the ground launch ofNew Zealand inNovember 2019 . Revenue inthe United States ,Japan ,Canada andThailand grew steadily, while revenue declined on a year over year basis in ourGreater China region andMexico . We launched our new Protandim® NAD Synergizer inOctober 2019 and have seen encouraging initial sales. We rolled out a free shipping program and pricing update, beginning inJanuary 2020 . All of these activities helped contribute to increased average order sizes as compared to the prior fiscal year.Americas . The following table sets forth revenue for the fiscal years endedJune 30, 2020 and 2019 for theAmericas region (in thousands): For the fiscal years ended June 30, 2020 2019 % change United States$ 155,480 $ 151,966 2.3 % Other 10,856 11,270 (3.7) % Americas Total$ 166,336 $ 163,236 1.9 % Revenue in theAmericas region for the fiscal year endedJune 30, 2020 increased$3.1 million , or 1.9%, compared to the prior year. Revenue in theAmericas increased due to the continued investment in our red carpet program, the introduction of our new Protandim® NAD Synergizer and the roll out of our free shipping program and pricing updates inJanuary 2020 . 41 --------------------------------------------------------------------------------Asia/Pacific &Europe . The following table sets forth revenue for the fiscal years endedJune 30, 2020 and 2019 for theAsia/Pacific &Europe region and its principal markets (in thousands): For the fiscal years ended June 30, 2020 2019 % change Japan $ 42,343$ 40,796 3.8 % Australia & New Zealand 9,065 5,851 54.9 % Greater China 6,682 7,924 (15.7) % Other 8,489 8,151 4.1 % Asia/Pacific & Europe Total $ 66,579$ 62,722 6.1 % Revenue in the region for the fiscal year endedJune 30, 2020 was positively impacted approximately$0.7 million , or 1.1%, by foreign currency exchange rate fluctuations. We saw encouraging revenue growth inJapan , which increased 3.8% year over year on aU.S. Dollar basis and 1.1% on a constant currency basis. During the fiscal year endedJune 30, 2020 , the Japanese yen, on average, strengthened against theU.S. Dollar, positively impacting our revenue in this market by$1.1 million or 2.8%. Revenue in ourAustralia and New Zealand markets grew significantly during fiscal 2020. We successfully completed our full on the ground launch ofNew Zealand inNovember 2019 . The launch ofNew Zealand created synergies between our Australian andNew Zealand distributor organizations and customer bases, further driving the growth within the region. Active accounts in the region increased slightly by 2.2% on a year over year basis also contributing to the growth. Revenue in ourGreater China region decreased by 15.7% year over year as we experienced continued weakening in ourHong Kong market, due, in part, to the global pandemic and other geopolitical events occurring in the region during the current year. We continue to work on refining our mainlandChina cross-border e-commerce business model and to date have not recognized significant revenues through this channel. Revenue inThailand grew steadily during the period, whileEurope remained stable. 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. We successfully launched our Protandim® NAD Synergizer, completed a full on the ground launch ofNew Zealand , and have plans for future market expansion. InFebruary 2020 , we held our first everDestination Elite Academy inCancun, Mexico which drove distributor excitement. We have plans for additional events designed to further engage and motivate our distributor base and provide additional tools and trainings to help them be successful in their businesses. Throughout the year, we continued the refinement and expansion of our product offerings internationally and have plans for continued product expansion in the future. 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. We continued investing in our red carpet program, which we believe has increased our ability to attract and retain strong distributor leadership and drive revenue growth throughout our markets. We remain committed to further refining and developing ourGreater China market, including our cross-border e-commerce business model to take advantage of the growth opportunities in that region. Gross Margin. Cost of sales were$38.0 million for the fiscal year endedJune 30, 2020 , and$38.0 million for the fiscal year endedJune 30, 2019 , resulting in a gross margin of$195.0 million , or 83.7%, and$188.0 million , or 83.2%, respectively. The increase in gross margin as a percentage of revenue is primarily due to benefits of a price update during the second half of fiscal 2020 and decreased inventory obsolescence and handling costs, partially offset by changes to our geographic and product sales mix related to the revenue growth and product expansion outside ofthe United States . Commissions and Incentives. Commissions and incentives expenses for the fiscal year endedJune 30, 2020 were$111.6 million or 47.9% of revenue compared to$108.6 million or 48.1% of revenue for the fiscal year endedJune 30, 2019 . The increase of$3.0 million in fiscal 2020 was due to the increase in revenue. Commissions and incentives expenses as a percentage of revenue decreased slightly during the comparable periods due, in part, to continued refinement 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 the timing and magnitude of compensation, incentive and promotional programs. Selling, General and Administrative. Selling, general and administrative expenses for the fiscal year endedJune 30, 2020 were$67.9 million or 29.2% of revenue compared to$69.6 million or 30.8% of revenue for the fiscal year endedJune 30, 2019 . The decrease of$1.6 million during the current period primarily was due to decreased expenses associated with employee 42 -------------------------------------------------------------------------------- compensation costs, including both cash and stock incentive compensation, and decreased events expenses as a result of changes to our event schedule and due to the cancellation of events as a result of meeting restrictions related to the COVID-19 pandemic. The decreases were partially offset by increased depreciation expenses due to digital assets placed in service and the acceleration of depreciation on various leasehold assets as well as increased bank fees due to our increased revenues during the year. 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. Other Expense. We recognized other expense for the fiscal year endedJune 30, 2020 of$0.8 million as compared to$0.6 million for the fiscal year endedJune 30, 2019 . The increase of$0.2 million was due to increased foreign exchange losses associated with the settlement of foreign transactions and net losses in currency hedges, both due to an increase in foreign exchange rate fluctuation during fiscal 2020. These losses were partially offset by a decrease in interest expense related to our term loan that was repaid in full during the year. The following table sets forth interest expense for the fiscal years endedJune 30, 2020 and 2019 (in thousands): For
the fiscal years ended
2020 2019
Contractual interest expense:
2016 Term Loan $ 44$ 227
Amortization of deferred financing fees:
2016 Term Loan 7 6
Amortization of debt discount:
2016 Term Loan 39 36 Other 30 54 Total interest expense $ 120$ 323 Income Tax Expense. Our income tax expense for the fiscal year endedJune 30, 2020 was$3.1 million as compared to income tax expense of$1.8 million for the fiscal year endedJune 30, 2019 . The effective tax rate was 21.2% of pre-tax income for the fiscal year endedJune 30, 2020 , compared to 19.5% for the fiscal year endedJune 30, 2019 . The tax rates for both fiscal 2020 and fiscal 2019 were favorably benefited by discrete book to tax differences resulting from the vesting of performance restricted stock units and favorable return to provision adjustments that occurred during the periods. The effective tax rates for both periods reflect the federal tax reform legislation enacted duringDecember 2017 that reduced the federal corporate tax rate to 21%. Our provision for income taxes for the fiscal year endedJune 30, 2020 consisted primarily of federal, state, and foreign tax on anticipated fiscal 2020 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, 2020 increased to$11.5 million compared to$7.4 million for the fiscal year endedJune 30, 2019 . Comparison of Fiscal Years EndedJune 30, 2019 and 2018 For a discussion of our results of operations for the fiscal 2019 compared with fiscal 2018, 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, 2019 , as filed with theSEC onAugust 14, 2019 . 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. 43 -------------------------------------------------------------------------------- AtJune 30, 2020 , our cash and cash equivalents were$22.1 million . This represented an increase of$3.3 million from the$18.8 million in cash and cash equivalents as ofJune 30, 2019 . During the fiscal year endedJune 30, 2020 , our net cash provided by operating activities was$18.3 million as compared to net cash provided by operating activities of$17.8 million during the fiscal year endedJune 30, 2019 . The increase in cash provided by operating activities during the fiscal year endedJune 30, 2020 primarily was due to increases in net income and depreciation expense, partially offset by an increase in cash used for prepaid expenses and other long-term assets and cash used for operating payables. During the fiscal year endedJune 30, 2020 , our net cash used in investing activities was$2.7 million , as a result of the purchase of fixed assets. During the fiscal year endedJune 30, 2019 , our net cash used in investing activities was$4.5 million , as a result of the purchase of fixed assets and investments in convertible notes receivable. Cash used in financing activities during the fiscal year endedJune 30, 2020 was$12.4 million , as a result of our quarterly principal payments on the 2016 Term Loan, which was repaid in full during fiscal 2020, shares purchased as payment of tax withholding upon vesting of employee equity awards and the repurchase of company stock, 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, 2019 was$11.1 million , as a result of principal payments on the 2016 Term Loan, repurchases of company stock and shares purchased as payment of tax withholding upon vesting of employee equity awards. AtJune 30, 2020 and 2019, the total amount of our foreign subsidiary cash was$6.8 million and$6.3 million , respectively. TheDecember 2017 tax reform previously mentioned 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 additionalU.S. taxes. AtJune 30, 2020 , we had working capital (current assets minus current liabilities) of$18.8 million compared to working capital of$17.0 million atJune 30, 2019 . The increase in working capital primarily was due to increases in cash and decreases in accounts payable, partially offset by an increase in commissions payable. Also, the notes receivable balance was converted to non-current equity securities. 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 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 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 is 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. 44 -------------------------------------------------------------------------------- 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 . 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 ofJune 30, 2020 , 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: •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$6.0 million ; and •Maintain a ratio of total liabilities to tangible net worth (as defined in the 2016 Loan Agreement, as amended) of not greater than 3.00 to 1.00 at the end of each quarter, measured on a trailing twelve month basis. During the fiscal year endedJune 30, 2020 , we repaid, in full, the remaining balance of the 2016 Term Loan in accordance with the terms of the 2016 Credit Facility, as amended. Commitments and Obligations The following table summarizes our contractual payment obligations and commitments as ofJune 30, 2020 (in thousands): Payments due by period Less than Contractual Obligations Total 1 year 1-3 years 3-5 years Thereafter Operating lease obligations (1)$ 22,614 $ 2,549 $ 5,310 $ 3,298 $ 11,457 Other operating obligations (2) 20,981 13,231 6,272 1,478 - Total$ 43,595 $ 15,780 $ 11,582 $ 4,776 $ 11,457
(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 AtJune 30, 2020 and 2019, we had no off-balance sheet arrangements. 45 -------------------------------------------------------------------------------- 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, 2020 , our shipments of products sold totaling approximately$21.7 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$0.3 million atJune 30, 2020 , compared with$0.4 million atJune 30, 2019 . To date, product 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, 2020 and 2019, we recognized expenses of$0.4 million and$0.8 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 46
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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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