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| LFVN.OB > SEC Filings for LFVN.OB > Form 10QSB on 14-May-2008 | All Recent SEC Filings |
14-May-2008
Quarterly Report
We began a turn-around strategy in January 2007 to reduce our cash drain by
cutting spending and lowering our operational expenses to a more appropriate
level. This effort was successful in slowing the cash drain of the Company until
such time as a new marketing strategy can be developed and implemented.
An additional part of this turnaround strategy has been to reduce the rapid and
consistent erosion of our direct sales, which has continued since our direct
sales first began in June 2005. Through the addition of key personnel and the
implementation of new, more effective, customer service retention and recapture
programs, we expect to reduce direct sales erosion experienced during fiscal
2007 and 2008.
We also began to focus on building the sales and re-establishing positive sales
momentum. In this regard, we have taken steps that we believe will help to
increase sales. Such steps include entering into license agreements, expanding
distribution, re-vamping our internet strategy and launching a direct response
TV campaign. In addition, we also are working on developing and improving
investor relations. These new strategies are being executed by David W. Brown,
our new Chief Executive Officer, who was hired in January 2008, and who has
significant industry experience.
Recent Developments
Hiring of Chief Executive Officer
The Company hired David Brown as its new President and Chief Executive Officer
effective January 10, 2008. Mr. Brown has vast nutraceutical experience and was
most recently the Managing Director and Co-Founder of Nutrition Business
Advisors, a firm founded in 2003 to provide strategic consulting services,
capital raising and full-service business development focused on the $130
billion Global Nutrition Industry. Prior to co-founding Nutrition Business
Advisors, Mr. Brown was President and Chief Executive Officer of Metabolife
International. From 1994 to 2000, Mr. Brown served as the President of Natural
Balance, Inc., a Colorado-based dietary supplement company. Mr. Brown began his
career as a corporate attorney, first at the Los Angeles based firm of Kindel &
Anderson, then at the Philadelphia based firm of Ballard, Spahr, Andrews &
Ingersoll. Mr. Brown holds a Juris Doctorate from Cornell University and a
Bachelors of Arts from Brigham Young University.
In connection with his appointment as President and Chief Executive Officer,
Mr. Brown entered into an Employment Agreement with the Company effective
January 10, 2008.
Changes in Certifying Accountant
The Company dismissed Gordon, Hughes & Banks, LLP as the Company's independent
registered public accounting firm effective as of January 30, 2008. The Company
appointed Ehrhardt Keefe Steiner & Hottman PC on January 30, 2008 as its
independent registered public accounting firm beginning for the three months
ended December 31, 2007, for the fiscal year ending June 30, 2008. The decision
to change accountants was recommended and approved by the Company's Board of
Directors and its Audit Committee on January 30, 2008.
2007 Private Placement
On September 26, and October 31, 2007, the Company issued convertible debentures
in a private placement offering. The convertible debentures are convertible into
the Company's common stock at $0.20 per share during their term and at maturity,
at the Company's option may be repaid in full or converted into common stock at
the lower $0.20 per share or the average trading price for the 10 days
immediately prior to the maturity date. The Convertible Debentures bear interest
at 8 percent per annum, and have a term of three years. Gross proceeds of
$1,490,000, were distributed to the Company pursuant to the issuance of
convertible debentures in the private placement offering. The Company also
issued warrants to purchase shares of the Company's common stock at $0.30 per
share in the private placement offering.
We intend to use the proceeds from the offering for marketing, scientific
research, development and testing of Protandim® and for working capital.
Registration Statement
On December 17, 2007, the Company filed a registration statement on Form SB-2
for the resale of shares of the Company's common stock underlying the
convertible debentures and warrants issued in the Company's 2007 private
placement offering and for certain consulting services to the Company, by the
holders of those convertible debentures and warrants (the "Registration
Statement").
On March 28, 2008, in light of recent amendments to Rule 144 of the Securities
Act of 1933, as amended, that shorten the holding periods for restricted
securities of reporting companies, the Company obtained a waiver of its
obligations to file the Registration Statement from holders of convertible
debentures and warrants sold in the 2007 private placement.
Re-Pricing of 2005 Private Placement Warrants
Effective as of June 28, 2007, we offered to reprice warrants to purchase
6,001,866 shares of our common stock issued to investors in 2005 pursuant to a
private placement offering (the "2005 warrants"). The 2005 warrants were
originally exercisable at $2.00 and $2.50 per share by the warrant holder and
were repriced to be exercisable at $0.30 per share upon the execution of a
warrant amendment by the Company and the warrant holder. As of March 31, 2008,
holders of 2005 warrants to purchase 3,395,706 shares of our common stock had
executed a warrant amendment, and 2005 warrants to purchase 3,395,706 shares of
our common stock had been repriced to be exercisable at $0.30 per share. As of
March 31, 2008, 2005 warrants to purchase 110,454 shares of our common stock had
been exercised at $0.30 per share. The 2005 warrants expired on April 18, 2008.
As of the April 18, 2008 expiration date of the 2005 warrants, 2005 warrants to
purchase 1,283,083 shares of the Company's common stock were exercised.
Three and Nine Months Ended March 31, 2008 Compared to Three and Nine Months
Ended March 31, 2007
Sales We generated revenues of approximately $784,000 during the three months
ended March 31, 2008 and approximately $995,000 during the same period of the
prior fiscal year. For the three month periods ended March 31, 2008 and 2007,
cost of sales was approximately $175,000 and $214,000 resulting in a gross
profit of approximately $609,000 and $782,000, respectively. We generated
revenues of approximately $2,388,000 during the nine months ended March 31, 2008
and approximately $4,208,000 during the same period of the prior fiscal year.
For the nine month periods ended March 31, 2008 and 2007, cost of sales was
approximately $538,000 and $838,000, resulting in a gross profit of
approximately $1,850,000 and $3,369,000, respectively. A nationally televised
news program in June 2005 continued to have an impact on sales during the three
and nine month periods ended March 31, 2007, although to a decreasing degree. No
similar national news exposure has subsequently occurred, resulting in a
continued decrease in sales and gross profit for the three and nine months ended
March 31, 2008.
Gross Margin Our gross profit percentage for the three month periods ended
March 31, 2008 was 78 percent and March 31, 2007 was 79 percent. Our gross
profit percentage for the nine month periods ended March 31, 2008 and 2007 was
77 percent and 80 percent, respectively. The slight decrease in margin for the
three and nine month periods ended March 31, 2008 is due to the discounts to
direct sales customers during the three and nine month periods ended March 31,
2008.
Operating Expenses Total operating expenses reported during the three month
period ended March 31, 2008 were approximately $1,146,000 as compared to
operating expenses of approximately $1,385,000 during the three month period
ended March 31, 2007. Operating expenses decreased approximately $239,000,
primarily due to expense reduction and cost containment programs implemented in
General and Administrative and Marketing and Customer Service departments. Total
operating expenses reported during the nine month period ended March 31, 2008
were approximately $3,032,000 as compared to operating expenses of approximately
$6,580,000 during the nine month period ended March 31, 2007. Operating expenses
decreased approximately $3,548,000 primarily due to a more targeted marketing
approach and reductions in personnel, consulting and other cost containment
programs implemented beginning during the three months ended March 31, 2007.
Marketing and Customer Service Expenses Marketing and customer service expense
decreased from approximately $505,000 in the three months ended March 31, 2007
to approximately $358,000 in the three months ended March 31, 2008. Marketing
and customer service expense also decreased from approximately $2,606,000 in the
nine months ended March 31, 2007 to $1,021,000 in the nine months ended
March 31, 2008 primarily due to more targeted advertising and cost containment
programs that we have implemented.
General and Administrative Expenses Our general and administrative expense
decreased from approximately $807,000 in the three months ended March 31, 2007
to approximately $702,000 in the three months ended March 31, 2008. General and
administrative expense decreased from approximately $3,607,000 in the nine
months ended March 31, 2007 to approximately $1,607,000 in the nine months ended
March 31, 2008. During the three months ended March 31, 2008, stock related
compensation was approximately $210,000 compared to approximately $112,000
during the three months ended March 31, 2007. During the nine months ended
March 31, 2008, stock related compensation was approximately $373,000 compared
to approximately $1,145,000 during the nine months ended March 31, 2007. The
reduction in general and administrative expenses is due to cost containment
programs that we have implemented.
Research and Development For the nine months ended March 31, 2008, our research
and development expenditures increased from approximately $196,000 to
approximately $244,000, as a result of research, development, and documentation
of the efficacy of Protandim®. Research and development expenditures for the
three months ended March 31, 2008 of approximately $25,000, decreased
approximately $32,000 from the $57,000 incurred during the three months ended
March 31, 2007, primarily due to staffing changes at the Company.
Depreciation and Amortization Expense Depreciation and amortization expense
increased from approximately $17,000 during the three months ended March 31,
2007 to approximately $61,000 in the three months ended March 31, 2008.
Depreciation and amortization expense increased from approximately $77,000
during the nine months ended March 31, 2007 to approximately $160,000 in the
nine months ended March 31, 2008. This increase was primarily due to the
commencement of the amortization of the Company's U.S. Patent granted on
July 10, 2007.
Net Other Income and Expense We recognized net other income of approximately
$21,000 in the three months ended March 31, 2007 as compared to net other
expense of approximately $67,000 in the three months ended March 31, 2008.
During the nine months ended March 31, 2008, the Company recognized net other
expense of approximately $123,000 as compared to net other income of
approximately $44,000 during the nine months ended March 31, 2007. The increase
in other expense is largely the result of interest expense related to the 2007
private placement.
Net Loss As a result of the revenues and expenses described above, the Company's
net loss was approximately $(605,000) for the three month period ended March 31,
2008 compared to a net loss of approximately $(582,000) for the three month
period ended March 31, 2007. For the nine months ended March 31, 2008 and 2007,
the Company's net loss was approximately $(1,305,000) and $(3,168,000),
respectively.
Our ability to finance future operations will depend on our existing liquidity
(discussed in more detail below) and, ultimately, on our ability to generate
additional revenues and profits from operations. However, even if we generate
revenues at increasing levels, the revenues generated may not be greater than
the expenses we incur. Operating results will depend on several factors,
including the selling price of the Protandim®, the number of units of Protandim®
sold, the costs of manufacturing and distributing Protandim®, the costs of
marketing and advertising, and other costs, including corporate overhead, which
we will incur.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are to finance the cost
of our planned marketing efforts, the manufacture and sale of Protandim® and to
pay our general and administrative expenses. Our primary sources of liquidity
are cash flow from the sales of our product and funds raised from our 2007
private placement.
At March 31, 2008, our available liquidity was approximately $1,312,000,
including available cash and cash equivalents and marketable securities, less
amounts borrowed against the Company's marketable securities. This represents an
increase of approximately $1,151,000 from the approximately $161,000 in cash,
cash equivalents and marketable securities as of June 30, 2007. From time to
time, the Company has invested in marketable securities including auction rate
preferred securities ("ARPS") to maximize interest income. We have been notified
by several of the corporate entities that have issued ARPS to the Company of
plans to refinance these instruments and we expect settlement of ARPS held by
the Company to occur during the next several months. During the nine months
ended March 31, 2008, our net cash used by operating activities was
approximately $169,000 as compared to net cash used by operating activities of
approximately $2,372,000 during the nine months ended March 31, 2007. The
Company's cash used by operating activities during the nine month period ended
March 31, 2008 decreased primarily as a result of cost savings initiatives
implemented during the prior fiscal year.
During the nine months ended March 31, 2008, our net cash used by investing
activities was approximately $1,431,000, primarily due to the purchase of
available-for-sale marketable securities. During the nine months ended March 31,
2007, cash flow from investing activities was approximately $2,869,000,
primarily due to redemption of marketable securities.
Cash provided by financing activities during the nine months ended March 31,
2008 was approximately $1,627,000, compared to cash used by financing activities
of approximately $1,500 during the nine months ended March 31, 2007. Cash
provided by financing activities during the nine month period ended March 31,
2008 was due to the proceeds from the Company's private placement of convertible
securities. Cash used by financing activities during the nine month period ended
March 31, 2007 was due to payments made under a capital lease obligation.
At March 31, 2008, we had working capital (current assets minus current
liabilities) of approximately $883,000, compared to working capital of
approximately $(46,000) at June 30, 2007. The increase in working capital was
due to the sale of convertible debentures in our 2007 private placement offering
and the return of certain merchant credit card deposits during the nine months
ended March 31, 2008.
On September 26, and October 31, 2007, the Company issued convertible debentures
in a private placement offering, which resulted in net proceeds received by the
Company of approximately $1,328,000. Based on the cost reduction initiatives
that we have undertaken to conserve our cash resources and the net proceeds
received by the Company on September 26 and October 31, 2007, we currently
anticipate that our cash resources will be sufficient to fund our anticipated
working capital and capital expenditure needs through at least March 31, 2009.
We base our spending in part on our expectations of future revenue levels from
the sale of Protandim®. If our revenue for a particular period is lower than
expected, we will take further steps to reduce our cash operating expenses
accordingly. Cash generated from operations has been insufficient to satisfy our
long-term liquidity requirements, which led us to seek additional financing.
Additional financing may be dilutive to our existing shareholders. In an effort
to conserve our cash resources, we initiated reductions in personnel, consulting
fees, advertising, and other general and administrative expenses. These measures
have reduced the scope of our planned operations during the later part of fiscal
2007 and the first nine months of fiscal 2008 by reducing our advertising budget
to promote Protandim®.
We plan to use the proceeds received from the 2007 private placement offering to
expand marketing efforts, scientific studies, intellectual property protection
and working capital in effort to grow direct to consumer and retail revenue.
However, our cash resources may run out sooner than expected if our future
revenue is lower than expected or our operating or other expenses are higher
than expected. If we are unable to increase revenues as planned, we may be
required to further reduce the scope of our planned operations, which could harm
our business, financial condition and operating results.
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 revenues and expenses during
the periods presented. Actual results could differ from these estimates. Our
significant accounting policies are described in Note 2 to our 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 foregoing disclosure.
Allowances for Product Returns We record allowances for product returns at the
time we ship the product. We base these accruals on the historical return rate
since the inception of our selling activities, and the specific historical
return patterns of the product. Our return rate since the inception of selling
activities is approximately 2 percent of sales.
We offer a 30-day, money back unconditional guarantee to all direct customers.
As of March 31, 2008, our March 2008 direct sales shipments of approximately
$230,000 were subject to the money back guarantee. We also replace product
returned due to damage during shipment wholly at our cost, the total of which
historically has been negligible.
As the Company has begun to recognize revenue associated with sales to
distributors, the Company has also utilized its return rate experience of
2 percent of sales to estimate returns on its sales to distributors.
We monitor our return estimate on an ongoing basis and may revise the allowances
to reflect our experience. Our allowance for product returns was approximately
$156,000 on March 31, 2008, compared with approximately $113,000 on June 30,
2007. To date, product expiration dates have not played any role in product
returns, and we do not expect they will in the foreseeable future because it is
unlikely that we will ship product with an expiration date earlier than the
latest allowable product return date.
Inventory Valuation We state inventories at the lower of cost or market on a
first-in first-out basis. From time to time, we maintain a reserve for inventory
obsolescence and we base this reserve on assumptions about current and future
product demand, inventory whose shelf life has expired and market conditions.
From time to time, we may be required to make additional reserves in the event
there is a change in any of these variables. We recorded no reserves for
obsolete inventory as of March 31, 2008 because our product and raw materials
have a shelf life of at least three (3) years based upon testing performed
quarterly in an accelerated aging chamber at our manufacturer's facility.
Revenue Recognition We ship the majority of our product by United Parcel Service
and receive payment for those shipments in the form of credit card charges. Our
return policy is to provide a 30-day money back guarantee on direct sales orders
placed by customers. After 30 days, we do not refund direct sales customers for
returned product. We have experienced monthly returns on direct sales orders
approximating less than 2 percent of sales. Sales revenue and estimated returns
are recorded when the merchandise is shipped and title and risk of loss passes
to the customer.
For retail customers, the Company analyzes its distributor contracts to
determine the appropriate accounting treatment for its recognition of revenue on
a customer by customer basis. Where the right of return exists beyond 30 days,
revenue and the related cost of sales is deferred until sufficient sell-through
data is received to reasonably estimate the amount of future returns.
We entered into an agreement with GNC for the sale of Protandim®, beginning July
2005, pursuant to which GNC has the right to return any and all product shipped
to GNC, at any time, for any reason. In July 2006, the Company began the
recognition of revenue under the agreement with GNC due to the accumulation of
historical sell-through and return data. The Company recognizes revenue and its
related costs when it obtains sufficient information to reasonably estimate the
amount of future returns. Accordingly, the Company recognizes revenue associated
with sales to GNC when the product is sold by GNC with an allowance for future
returns based on historical product return information. Prior to July 2006, all
revenue and related costs from GNC were deferred.
In July 2006, LifeVantage entered into an agreement with CVS for the sale of
Protandim® throughout the CVS store network. During the three months ended
March 31, 2008, the Company agreed to accept, pursuant to a return
authorization, a portion of the product from CVS Stores that had not been sold
through this retail channel. As of March 31, 2008 sufficient bottles were
returned by CVS to offset the receivable from CVS and both parties agreed to
waive any further obligations from the other party and the supply arrangement
was terminated.
Research and Development Costs We have expensed all of our payments related to
research and development activities.
Derivative Instruments In connection with the sale of debt or equity
instruments, we may sell options or warrants to purchase our common stock. In
certain circumstances, these options or warrants may be classified as derivative
. . .
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