Lifevantage Corp (LFVN) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes, which are included in this Annual Report on Form 10-K.
Overview
We are a company focused on nutrigenomics, the study of how nutrition and naturally occurring compounds affect human genes to support good health. We are dedicated to helping people achieve their health, wellness, and financial goals. We provide quality, scientifically validated products to customers and independent consultants as well as a financially rewarding commission-based direct sales opportunity to our independent consultants. We engage in the identification, research, development, formulation and sale 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 consultants in two geographic regions that we have classified as the Americas region and the Asia/Pacific and Europe region.
The success and growth of our business is primarily based on the effectiveness of our independent consultants to attract and retain customers in order to sell our products and our ability to attract and retain independent consultants. When we are successful in attracting and retaining independent consultants and customers, it is largely because of:
•Our products, including our flagship Protandim® family of scientifically validated dietary supplements, LifeVantage® Omega+, ProBio, IC Bright®, Rise AM, Reset PM, Daily Wellness, D3+, and PhysIQ Fat Burn and Prebiotic dietary supplements, our line of TrueScience® skin and hair care products and Liquid Collagen, Petandim®, our companion pet supplement formulated to combat oxidative stress in dogs, and AXIO®, our nootropic energy drink mixes;
•Our sales compensation plan and other sales initiatives and incentives; and
•Our delivery of superior customer service.
As a result, it is vital to our success that we leverage our product development resources to develop and introduce compelling and innovative products and provide opportunities for our independent consultants 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. We sold our products in China through a China approved cross-border e-commerce business model until March 15, 2023, at
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which time we closed our e-commerce business in China. In addition, we sell our products in a number of countries for personal consumption only. 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.
Our Products
Our products are the Protandim® line of scientifically validated dietary supplements, LifeVantage® Omega+, ProBio, IC Bright®, Rise AM, Reset PM, D3+, Daily Wellness, and PhysIQ Fat Burn and Prebiotic dietary supplements, TrueScience®, our line of skin and hair care products and Liquid Collagen, Petandim®, our companion pet supplement formulated to combat oxidative stress in dogs, and AXIO®, our nootropic energy drink mixes. 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 it has been shown to double sirtuin activity, supporting increased health, focus, energy, mental clarity, and mood. Use of the three Protandim® products together, marketed as the Protandim® Tri-Synergizer®, 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® Daily Wellness is a dietary supplement designed to support immune health. IC Bright® is a dietary supplement to help support eye and brain health, reduce eye fatigue and strain, support cognitive functions, and may help support normal sleep patterns. PhysIQ Fat Burn is a dietary supplement designed to support weight management, and PhysIQ Prebiotic is a dietary supplement designed to support a healthy digestive tract. Our Nrf2 enhanced TrueScience® line of anti-aging skin and hair care products includes TrueScience® TrueClean Refining Cleanser, TrueScience® TrueRenew Daily Firming Complex, TrueScience® TrueLift Illuminating Eye Cream, TrueScience® TrueHydrate Brightening Moisturizer, TrueScience® TrueTone Perfecting Lotion, TrueScience® TrueProtect Daily Mineral Sunstick SPF 30, TrueScience® Perfecting Lotion, TrueScience® Hand Cream, TrueScience® Invigorating Shampoo, TrueScience® Nourishing Conditioner, TrueScience® Scalp Serum, and TrueScience® Liquid Collagen. TrueScience® Liquid Collagen activates, replenishes, and maintains collagen to support firmness and elasticity from within. 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. We believe our significant number of customers who regularly and repeatedly purchase our products is a strong indicator of the health benefits of our products.
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. In fiscal year 2024, our stack strategy evolved with a focus on the brand message of Activation with three stacks that tell the unique LifeVantage Activation story from an inside-out approach. This builds upon the synergistic benefits that were demonstrated in fiscal year 2023 with our Healthy Glow Essentials stack. The Inside-Out Activation Duo features Nrf2 Synergizer® and TrueScience® TrueRenew Daily Firming Complex. This duo activates antioxidants for good health on the inside and a cleaner, kinder retinol alternative for skin that looks and feels healthy and youthful on the outside. The LifeVantage Activation Essentials Stack contains Nrf2 Synergizer® TrueScience® Liquid Collagen, and TrueScience® TrueRenew Daily Firming Complex. Finally our Healthy Glow + Activated Skin Care Collection contains Nrf2 Synergizer®, TrueScience® Liquid Collagen, and the full Activated Skin Care Collection. We continue to offer other popular packs such as the Vitality Stack (Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, LifeVantage® Omega+ and LifeVantage® ProBio), the Ultimate Stack (Vitality Stack + Protandim® NAD Synergizer® and PhysIQ Prebiotic), and the Protandim® Tri-Synergizer™ (Protandim® NRF1 Synergizer®, Protandim® Nrf2 Synergizer®, and Protandim® NAD Synergizer®).
The following table shows revenue by major product line for the fiscal years ended June 30, 2024 and 2023.
| Years ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| Protandim® product line | $ | 104,135 | 52.0 | % | $ | 119,720 | 56.1 | % | |||||
| TrueScience® product line | 56,252 | 28.1 | % | 49,494 | 23.2 | % | |||||||
| Other | 39,777 | 19.9 | % | 44,184 | 20.7 | % | |||||||
| Total | $ | 200,164 | 100.0 | % | $ | 213,398 | 100.0 | % |
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Our revenue is largely attributed to two product lines, Protandim® and TrueScience® each of which accounted for more than 10% of total revenue for each of the fiscal years ended June 30, 2024 and 2023. On a combined basis, these product lines represent approximately 80.1% and 79.3% of our total net revenue for the fiscal years ended June 30, 2024 and 2023, 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 consultants 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 consultants to attract and retain customers to purchase our products, and our ability to attract new and retain existing independent consultants. Changes in our product sales are typically the result of variations in product sales volume relating to fluctuations in the number of active independent consultants and customers purchasing our products. The number of active independent consultants 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 consultants 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, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Change from Prior Year | Percent Change | ||||||||||||||
| Active Independent Consultants | |||||||||||||||||
| Americas | 31,000 | 63.3 | % | 33,000 | 61.1 | % | (2,000) | (6.1) | % | ||||||||
| Asia/Pacific & Europe | 18,000 | 36.7 | % | 21,000 | 38.9 | % | (3,000) | (14.3) | % | ||||||||
| Total Active Independent Consultants | 49,000 | 100.0 | % | 54,000 | 100.0 | % | (5,000) | (9.3) | % | ||||||||
| Active Customers | |||||||||||||||||
| Americas | 63,000 | 79.7 | % | 69,000 | 77.5 | % | (6,000) | (8.7) | % | ||||||||
| Asia/Pacific & Europe | 16,000 | 20.3 | % | 20,000 | 22.5 | % | (4,000) | (20.0) | % | ||||||||
| Total Active Customers | 79,000 | 100.0 | % | 89,000 | 100.0 | % | (10,000) | (11.2) | % | ||||||||
| Active Accounts | |||||||||||||||||
| Americas | 94,000 | 73.4 | % | 102,000 | 71.3 | % | (8,000) | (7.8) | % | ||||||||
| Asia/Pacific & Europe | 34,000 | 26.6 | % | 41,000 | 28.7 | % | (7,000) | (17.1) | % | ||||||||
| Total Active Accounts | 128,000 | 100.0 | % | 143,000 | 100.0 | % | (15,000) | (10.5) | % |
Income Statement Presentation
We report revenue in two geographic regions, and we translate revenue from each market's local currency into U.S. Dollars using weighted-average exchange rates. Revenue consists primarily of product sales, fee revenue, and shipping and handling fees, net of applicable sales discounts. Revenue is recognized at the time of shipment, which is when the passage of title and risk of loss to customers occurs. Also reflected in revenue is a provision for product returns and allowances, which is estimated based on our historical experience. The following table sets forth net revenue information by region for the years indicated. The
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following table should be reviewed in connection with the tables presented under "Results of Operations" (in thousands):
| For the fiscal years ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||
| Americas | $ | 152,907 | 76.4 | % | $ | 155,361 | 72.8 | % | |||||
| Asia/Pacific & Europe | 47,257 | 23.6 | % | 58,037 | 27.2 | % | |||||||
| Total | $ | 200,164 | 100.0 | % | $ | 213,398 | 100.0 | % |
Cost of sales primarily consists of costs of products purchased from and manufactured by third-party vendors, shipping and order fulfillment costs, costs of adjustments to inventory carrying value, and costs of marketing materials which we sell to our independent consultant 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 consultants, special incentives and costs for incentive trips and other rewards. Commissions and incentives expenses do not include any amounts we pay to our independent consultants related to their personal purchases. Commissions paid to independent consultants on personal purchases are considered a sales discount and are reported as a reduction to net revenue. Our sales compensation plan is an important factor in our ability to attract and retain our independent consultants. Under our sales compensation plan, independent consultants 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 consultants. 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 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. In fiscal year 2023, we introduced our new compensation plan, called the Evolve Compensation Plan, in four markets – the United States, Japan, Australia, and New Zealand. In fiscal year 2024, we introduced the Evolve Compensation Plan to Canada, Mexico, and Europe, with plans to introduce our new compensation plan to the remaining markets in the future.
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 consultant conventions and events held in various markets worldwide, which we expense in the period in which they are incurred. Marketing and event costs also include expenses associated with our sponsorship of the Major League Soccer team, Real Salt Lake. Our agreement with Real Salt Lake ended in December 2023.
Sales to customers outside the United States are transacted in the respective local currencies and are translated to U.S. Dollars at weighted-average currency exchange rates for each monthly accounting period to which they relate. Consequently, our net sales and earnings are affected by changes in currency exchange rates. In general, sales and gross profit are affected positively by a weakening U.S. Dollar and negatively by a strengthening U.S. Dollar. Currency fluctuations, however, have the opposite effect on our commissions paid to independent consultants 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 ended June 30, 2024 and 2023, we generated net revenue of $200.2 million and $213.4 million, respectively, recognized operating income of $4.3 million and $4.3 million, respectively, and recognized net income of $2.9 million and $2.5 million, respectively.
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The following table presents certain consolidated earnings data as a percentage of net revenue for the years indicated:
| For the fiscal years ended June 30, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Revenue, net | 100.0 | % | 100.0 | % | |
| Cost of sales | 20.7 | 20.3 | |||
| Gross profit | 79.3 | 79.7 | |||
| Operating expenses: | |||||
| Commissions and incentives | 42.9 | 44.4 | |||
| Selling, general and administrative | 34.2 | 33.3 | |||
| Total operating expenses | 77.1 | 77.7 | |||
| Operating income | 2.2 | 2.0 | |||
| Other income (expense): | |||||
| Interest income, net | 0.2 | 0.1 | |||
| Other expense, net | (0.2) | (0.2) | |||
| Total other expense | — | (0.1) | |||
| Income before income taxes | 2.2 | 1.9 | |||
| Income tax expense | (0.7) | (0.7) | |||
| Net income | 1.5 | % | 1.2 | % |
Comparison of Fiscal Years Ended June 30, 2024 and 2023
Net Revenue. We generated net revenue of $200.2 million and $213.4 million during the fiscal years ended June 30, 2024 and 2023, respectively. The overall decrease in revenue is attributed mainly to a decrease in our total Active Accounts, which declined by 10.5% during fiscal year 2024. The decrease was partially offset by an increase average revenue per account driven by our TrueScience® Liquid Collagen product, which is now available in most of our markets. Total TrueScience® Liquid Collagen related revenue, including the product when sold as part of a bundle, was $48.5 million for the fiscal year ended June 30, 2024 compared to $39.8 million for the fiscal year ended June 30, 2023. We also increased product and shipping prices during the fiscal year ended June 30, 2024. Offsetting the increase in our TrueScience® Liquid Collagen product was a decrease of $15.6 million in sales from our Protandim® products as well as decreases in other product lines of approximately $6.3 million, and the negative impacts of foreign currency fluctuations compared to fiscal year ended June 30, 2023. In fiscal year 2024, foreign currency fluctuations negatively impacted our net revenue $2.2 million or 1.0%.
Americas. The following table sets forth revenue for the fiscal years ended June 30, 2024 and 2023 for the Americas region (in thousands):
| For the fiscal years ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % change | ||||||||
| United States | $ | 145,679 | $ | 148,522 | (1.9) | % | ||||
| Other | 7,228 | 6,839 | 5.7 | % | ||||||
| Americas Total | $ | 152,907 | $ | 155,361 | (1.6) | % |
Revenue in the Americas region for the fiscal year ended June 30, 2024 decreased $2.5 million, or 1.6%, compared to the prior year. Total Active Accounts decreased 7.8% in the region compared to the prior fiscal year which contributed to the decrease in revenue. In the United States, the decrease in revenue due to the decrease in Active Accounts was partially offset by revenue from TrueScience® Liquid Collagen of $39.5 million for the fiscal year ended June 30, 2024 compared to $36.2 million for the fiscal year ended June 30, 2023. Revenue from Mexico, increased $1.0 million in fiscal year 2024 as a result of an increase in Active Accounts in this market by 61.9% and the launch of TrueScience® Liquid Collagen in this market.
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Asia/Pacific & Europe. The following table sets forth revenue for the fiscal years ended June 30, 2024 and 2023 for the Asia/Pacific and Europe region and its principal markets (in thousands):
| For the fiscal years ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % change | ||||||||
| Japan | $ | 26,989 | $ | 32,083 | (15.9) | % | ||||
| Australia & New Zealand | 8,020 | 8,922 | (10.1) | % | ||||||
| Greater China | 2,882 | 3,526 | (18.3) | % | ||||||
| Other | 9,366 | 13,506 | (30.7) | % | ||||||
| Asia/Pacific & Europe Total | $ | 47,257 | $ | 58,037 | (18.6) | % |
Revenue in the Asia/Pacific and Europe region for the fiscal year ended June 30, 2024 decreased $10.8 million, or 18.6%, compared to the prior year. Revenue in the region was negatively impacted approximately $2.4 million, or 4.3%, by foreign currency exchange rate fluctuations.
Revenue in our Japan market decreased 15.9% year over year on a U.S. Dollar basis and decreased 9.0% on a constant currency basis. Contributing to the decrease in revenue on a constant currency basis was revenue related to the decrease in Active Accounts by 11.6% year over year. Total revenue related to the sale of TrueScience® Liquid Collagen was $4.3 million for the fiscal year ended June 30, 2024 compared to $2.3 million from the prior year, which partially offset the decrease in revenue. During the fiscal year ended June 30, 2024, the Japanese yen, on average, weakened against the U.S. Dollar, negatively impacting our revenue in this market by $2.2 million or 6.9%.
Revenue in our Australia and New Zealand markets decreased $0.9 million, or 10.1%, during fiscal year 2024. The decrease in revenue in these markets primarily resulted from a decrease in the number of Active Accounts, partially offset by revenue from the launch of TrueScience® Liquid Collagen in March 2023. Revenue related to the sale of TrueScience® Liquid Collagen was $0.5 million for the fiscal year ended June 30, 2024 compared to $0.2 million from the prior year.
Revenue in our Greater China region decreased by 18.3% year over year primarily due to a 15.7% decline in our average number of Active Accounts within the market from fiscal year 2023 to fiscal year 2024. Also contributing to the decline in revenue was the closure of our e-commerce business in China in March 2023.
The decline in revenue in our other markets was driven by a decrease in revenue from the Philippines. Revenue from our Philippines market was $2.6 million during fiscal year 2024 compared to $5.9 million during fiscal year 2023. Total Active Accounts decreased by 49.0% in the current fiscal year.
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. In October 2023, we relaunched our TrueScience® Skin Care line with entirely new branding premium packaging, and improved formulas. Rebranded as the TrueScience® Activated Skin Care Collection, this line includes TrueClean Refining Cleanser, TrueRenew Daily Firming Complex, TrueLift Illuminating Eye Cream, and TrueHydrate Brightening Moisturizer. This was a global launch in all markets. In the United States, we also launched TrueScience® TrueProtect Daily Mineral Sunstick, a broad-spectrum, 30 SPF mineral sunscreen that addresses the appearance of sun-induced hyperpigmentation and wrinkles as it protects against future damage. We will continue the refinement and expansion of our product offerings internationally during fiscal year 2025 and beyond. We expect this expansion will continue to drive revenue growth globally through increased average order size and increased ability to attract and retain new independent consultants and customers with a compelling product lineup.
In January 2023, we announced the adoption our Evolve Compensation Plan for our independent consultants, which became effective in March 2023, in our United States, Australia, New Zealand and Japan markets. In February 2024, we launched the Evolve Compensation Plan in our Canada, Mexico, and Europe markets. This new compensation plan is designed to reward our independent consultants for product sales to their customers as well as the product sales made through the sales networks they have developed and trained.
In March 2023, we launched Rewards Circle, our first-ever customer loyalty program, in the United States, Australia, New Zealand, and Japan. This program was introduced to our Canada, Mexico, and Europe markets in February 2024. Rewards Circle is focused on supporting customer retention for independent consultants, supporting their efforts to grow and maintain their LifeVantage business. We have seen an increase in average revenue per account since the launch of this program and continue to monitor retention trends for our independent consultants and customers.
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During fiscal year 2025, our main focus will be to increase our average account base through concentrating our efforts on the enrollment of new independent consultants and customers, who will in turn help grow the business through incremental product sales, and on increasing the number of accounts that place an order in the month following their initial enrollment. This will be achieved through continued focus on our Evolve Compensation Plan and Rewards Circle loyalty program. We will continue investing in our red-carpet program, which we believe has increased our ability to attract and retain strong consultant leadership and is a significant opportunity to drive revenue growth throughout our markets. We remain committed to further expanding the functionality and availability of our digital tools, which we believe will aid independent consultants in initiating and expanding their businesses.
Cost of Sales. Cost of sales were $41.4 million for the fiscal year ended June 30, 2024, and $43.4 million for the fiscal year ended June 30, 2023, resulting in a gross margin of $158.7 million, or 79.3%, and $170.0 million, or 79.7%, respectively. The increase in cost of sales as a percentage of revenue is primarily due to shift in product mix, increased raw material and manufacturing related costs, shipping expenses, and warehouse fulfillment expenses during the current fiscal year.
Commissions and Incentives. Commissions and incentives expenses for the fiscal year ended June 30, 2024 were $85.9 million or 42.9% of revenue compared to $94.7 million or 44.4% of revenue for the fiscal year ended June 30, 2023. The decrease of $8.8 million in fiscal year 2024 was primarily due to the overall decrease in commissionable sales during fiscal year 2024 compared to fiscal year 2023 along with decreases in promotion payouts to our independent consultants. The decrease in percentage of commissions and incentives to revenue was primarily due to changes in sales mix and the impact of price increases, as well as the timing and magnitude of promotional and incentive programs.
Commissions and incentives expenses, as a percentage of revenue, may fluctuate in future periods based on our ability to hold incentive trips and events and the timing and magnitude of compensation, incentive, and promotional programs.
Selling, General and Administrative. Selling, general and administrative expenses for the fiscal year ended June 30, 2024 were $68.5 million or 34.2% of revenue compared to $71.1 million or 33.3% of revenue for the fiscal year ended June 30, 2023. The increase in selling, general, and administrative expenses as a percentage of revenue during fiscal year 2024 primarily was due to primarily due to increased proxy contest related expenses of $5.1 million. These increases have been partially offset by decreases in event costs, endorsement agreements, employee compensation related expenses, office lease and professional services expenses.
Primary factors that may cause our selling, general and administrative expenses to fluctuate in the future include changes in the number of employees, the timing and number of events we hold, the termination of material agreements like our agreement with Real Salt Lake, 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 stock-based compensation expense relating to equity awards made in future years.
Interest Income. Interest income, net, for the fiscal year ended June 30, 2024 was $0.4 million as compared $0.2 million for the fiscal year ended June 30, 2023. During the fiscal year ended June 30, 2024, we benefited from higher interest rates earned on our money market accounts.
Other Expense, Net. We recognized other expense, net, for the fiscal year ended June 30, 2024 of $0.4 million as compared to $0.5 million for the fiscal year ended June 30, 2023. The decrease was primarily due to the impact of foreign currency fluctuations recognized during fiscal year 2024.
Income Tax Expense. Our income tax expense for the fiscal year ended June 30, 2024 was $1.4 million as compared to income tax expense of $1.5 million for the fiscal year ended June 30, 2023.
The effective tax rate was 32.5% of pre-tax income for the fiscal year ended June 30, 2024, compared to 36.5% for the fiscal year ended June 30, 2023. The decrease in the effective tax rate for fiscal year 2024 compared to the prior year is mainly due to the impact of permanent items in relation to pre-tax income.
Our provision for income taxes for the fiscal year ended June 30, 2024 consisted primarily of federal, state, and foreign tax on anticipated fiscal year 2024 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 ended June 30, 2024 increased to $2.9 million compared to $2.5 million for the fiscal year ended June 30, 2023.
Comparison of Fiscal Years Ended June 30, 2023 and 2022
For a discussion of our results of operations for the fiscal year 2023 compared with fiscal year 2022, 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 ended June 30, 2023, as filed with the SEC on August 28, 2023.
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Liquidity and Capital Resources
We continually assess our capital allocation strategy to maximize stockholder value. Our current capital allocation strategy follows a balanced approach focused on supporting and re-investing in the business, as well as returning stockholder value through quarterly dividends and opportunistic share repurchases, where appropriate.
Liquidity
Our primary liquidity and capital resource requirements are to service our debt, which includes any outstanding balances under the 2024 Credit Facility, and finance the cost of our planned operating expenses and working capital (principally inventory purchases), as well as capital expenditures. We have generally relied on cash flow from operations to fund operating activities and we have, at times, incurred long-term debt in order to fund stock repurchases and strategic transactions.
At June 30, 2024, our cash and cash equivalents were $16.9 million. This represented a decrease of $4.7 million from the $21.6 million in cash and cash equivalents as of June 30, 2023.
During the fiscal year ended June 30, 2024, our net cash provided by operating activities was $12.2 million as compared to $6.8 million during the fiscal year ended June 30, 2023. The increase in cash provided by operating activities during the fiscal year ended June 30, 2024 primarily was due to increases in net income, accounts payable, and decreases in prepaid expenses offset by increases in accounts receivable.
During the fiscal year ended June 30, 2024, our net cash used in investing activities was $2.2 million, which was attributable to capital expenditures including leasehold improvements related to moving our Tokyo, Japan office. During the fiscal year ended June 30, 2023, our net cash used in investing activities was $3.1 million, as a result of the purchase of fixed assets, primarily from investing in changes to our Evolve Compensation Plan and Rewards Circle loyalty program through software, website, and mobile application development.
Cash used in financing activities during the fiscal year ended June 30, 2024 was $14.4 million, as a result of the payment of a one-time cash dividend in September 2023, quarterly cash dividends, the repurchase of company stock, and shares purchased as payment of tax withholding upon vesting of employee equity awards, partially offset by proceeds from purchases of company stock under our employee stock purchase plan. Cash used in financing activities during the fiscal year ended June 30, 2023 was $2.4 million, as a result of the repurchase of company stock, payment of quarterly cash dividends, and shares purchased as payment of tax withholding upon vesting of employee equity awards, partially offset by proceeds from stock option exercises and proceeds from purchases of company stock under our employee stock purchase plan.
At June 30, 2024 and 2023, the total amount of our foreign subsidiary cash was $7.3 million and $6.2 million, respectively. Under current U.S. tax law, in the future, if needed, we expect to be able to repatriate cash from foreign subsidiaries without paying additional U.S. taxes.
At June 30, 2024, we had working capital (current assets minus current liabilities) of $15.3 million compared to working capital of $24.7 million at June 30, 2023. The decrease in working capital primarily was due to decreases in cash, inventory, and prepaid expenses and increases in accounts payable, partially offset by increase in accounts receivable. We believe that our cash and cash equivalents balances and our ongoing cash flow from operations will be sufficient to satisfy our cash requirements for at least the next 12 months. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow. In the event that our current cash balances and future cash flow from operations are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds, which may not be available on terms that are acceptable to us, or at all. Our 2024 Credit Facility, however, contains covenants that in certain circumstances restrict our ability to incur additional indebtedness, make certain investments, purchase or otherwise acquire all or substantially all the assets or equity interests of other companies, or transfer any part of the business. Additionally, our 2024 Credit Facility provides for a line of credit 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 31, 2023, we filed a shelf registration statement on Form S-3 (the “2023 Shelf Registration”) with the SEC that was declared effective on April 6, 2023, 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 2023 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.
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2016 Credit Facility
On March 30, 2016, we entered into a loan agreement (the "2016 Loan Agreement") and a security agreement (the "2016 Security Agreement"). The 2016 Loan Agreement provided 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 2016 Security Agreement, and with the amendments described below, the "2016 Credit Facility"). During the fiscal year ended June 30, 2020, we repaid, in full, the balance of the 2016 Term Loan.
On May 4, 2018 and February 1, 2019, we entered into loan modification agreements (“Amendment No. 1” and “Amendment No. 2”, respectively). These loan modification agreements amended certain financial covenants and the available borrowing amount under the 2016 Revolving Loan.
On April 1, 2021, we entered into a loan modification agreement ("Amendment No. 3"), which further amended the 2016 Credit Facility, as previously amended, to provide for an available borrowing amount of $5.0 million, a revised maturity date from March 31, 2021 to March 31, 2024, and a modified 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 minimum fixed charge coverage ratio of 1.10 to 1.00 or the minimum working capital of $6.0 million as set forth in previous amendments.
We entered into a loan modification agreement ("Amendment No. 4"), effective September 30, 2022, which further amended the 2016 Credit Facility. Amendment No. 4 revised the calculation of the minimum fixed charge coverage ratio (as defined in Amendment No. 4) and allowed us to declare and pay dividends, up to $500,000 per quarter, through September 30, 2023. There were no other changes to the covenants or revolving loan facility as set forth in Amendment No. 3.
On August 28, 2023, we received approval, without modifying Amendment No. 4, to declare and pay a one-time cash dividend of $0.40 per share of common stock, to be paid on September 22, 2023. We also received approval to declare and pay dividends, up to $750,000 per quarter, through September 30, 2024.
On March 31, 2024, the 2016 Credit Facility reached the maturity date and was terminated. As of March 31, 2024, there was no balance outstanding under the 2016 Credit Facility.
2024 Credit Facility
On April 12, 2024, we entered into a Loan Agreement (the “Loan Agreement”) with Bank of America, N.A., as Lender (the “Lender”). In connection with the Loan Agreement and on the same date, we, Lifeline Nutraceuticals Corporation, as Guarantor (the “Guarantor”), and the Lender also entered into a Continuing and Unconditional Guaranty (the “Continuing and Unconditional Guaranty”) and a Security and Pledge Agreement (the “Security and Pledge Agreement”). The Loan Agreement provides for a revolving line of credit in an aggregate principal amount not to exceed $5.0 million (the “Line of Credit”) and collectively with the Loan Agreement, the Continuing and Unconditional Guaranty and the Security and Pledge Agreement, the “2024 Credit Facility”).
In the event we borrow under the Line of Credit, interest will be payable commencing May 31, 2024, and then on the last day of each month thereafter until payment in full of all principal outstanding under the Line of Credit, with all unpaid principal and interest due on April 12, 2027 (the “Expiration Date”). The Line of Credit will bear interest at a rate per year equal to the sum of (i) the greater of the Term SOFR Daily Floating Rate (as defined in the Loan Agreement) or 0.00%, plus (ii) 2.00%. Amounts under the Line of Credit may be repaid and re-borrowed from time to time until the Expiration Date.
Our obligations under the Loan Agreement are secured by a security interest in substantially all of the assets of the Company and the Guarantor, as further provided for in the Security and Pledge Agreement. Pursuant to the Continuing and Unconditional Guaranty, the Guarantor guarantees and promises to pay promptly to the Lender all indebtedness of the Company when due.
The Loan Agreement contains customary covenants, including affirmative and negative covenants that in certain circumstances restrict our ability to incur additional indebtedness, make certain investments, purchase or otherwise acquire all or substantially all the assets or equity interests of other companies, or transfer any part of the business or any assets of the Company or the Guarantor. The Loan Agreement requires us to maintain specified financial ratios and satisfy certain financial condition tests.
The Loan Agreement contains certain customary events of default, including, among other things, our failure to make required payments under the Loan Agreement, certain breaches of representations made by us or the Guarantor, insolvency or
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bankruptcy of the Company or the Guarantor, failure to have an enforceable first lien or security interest in any property given as security for the Loan Agreement, or our failure to comply with covenants set forth in the Loan Agreement. If an event of default occurs under the Loan Agreement, the obligation of the Lender to make any additional credit available to us may be terminated and the amounts outstanding may become immediately due and payable in the discretion of the Lender, provided that in the event of insolvency or bankruptcy of the Company or the Guarantor, all debts outstanding under the Loan Agreement will automatically become due and payable. Upon the occurrence of any default or after maturity, all amounts outstanding under the Loan Agreement will at the option of the Lender bear interest at a rate which is 2.00% higher than the rate of interest otherwise provided under the Loan Agreement.
As of June 30, 2024, there was no outstanding balance under the 2024 Credit Facility.
Commitments and Obligations
Please refer to Note 13 to the consolidated financial statements contained in this report for information regarding our contingent liabilities.
Critical Accounting Policies and Estimates
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 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, and the audit committee has reviewed the disclosures noted below.
Inventory Valuation
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. If inventory on hand exceeds projected demand or the expected market value is less than the carrying value, the excess is written down to its net realizable value. If actual demand or the estimate of market value decreases, additional write-downs would be required.
During the fiscal years ended June 30, 2024 and 2023, we recognized expenses of $0.9 million and $1.2 million, respectively, related to obsolete and slow-moving inventory.
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.
Historically, our estimates and underlying assumptions have not materially deviated from our actual reported results and rates. However, we base assumptions we use on our best estimates, which involves inherent uncertainties based on market conditions that are outside of our control. If actual results are not consistent with the assumptions we use, the stock-based compensation expense reported in our consolidated financial statements may not be representative of the actual economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our estimated forfeitures, we may be required to adjust our consolidated financial statements in future periods.
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Income Taxes
The provision for income taxes includes income from U.S. and foreign subsidiaries taxed at statutory rates, the accrual or release of amounts for tax uncertainties, and U.S. tax impacts of foreign income in the U.S.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities on the financial statements and their respective tax bases. Deferred tax assets also are recognized for net operating losses and credit carryforwards. Deferred tax assets and liabilities are measured using the enacted rates applicable to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. An assessment is made as to whether or not a valuation allowance is required to offset deferred tax assets. This assessment requires estimates as to future operating results, as well as an evaluation of the effectiveness of our tax planning strategies. These estimates are made on an ongoing basis based upon our business plans and growth strategies in each market and consequently, future material changes in the valuation allowance are possible. The valuation allowance reduces the deferred tax assets to an amount that management determined is more-likely-than-not to be realized.
We operate in and file income tax returns in the U.S. and numerous foreign jurisdictions with complex tax laws and regulations, which are subject to examination by tax authorities. The complexity of our global structure requires specialized knowledge and judgment in determining the application of tax laws in various jurisdictions. Years open to examination contain matters that could be subject to differing interpretations of applicable tax laws and regulations related to the amount and/or timing of income, deductions, and tax credits. We account for uncertain tax positions in accordance with Accounting Standards Codification ("ASC) 740, Income Taxes. This guidance prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Interest and penalties related to tax contingency or settlement items are recorded as a component of the provision for income taxes in our Consolidated Statements of Operations and Comprehensive Income. We record accruals for tax contingencies as a component of accrued liabilities or other long-term liabilities on our Consolidated Balance Sheet.
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.