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Summary of Significant Accounting Policies:
 9 Months Ended
Mar. 31, 2012
Summary of Significant Accounting Policies: [Abstract]  
Summary of Significant Accounting Policies:

Note 2 — Summary of Significant Accounting Policies:

Consolidation

The accompanying financial statements include the accounts of LifeVantage Corporation and our wholly-owned subsidiaries Lifeline Nutraceuticals Corporation (“LNC”), LifeVantage de México, S. de R.L. de C.V. (Limited Liability Company), Importadora LifeVantage, S. de R.L. de C.V. (Limited Liability Company), and Servicios Administrativos para la Importación de Productos Body & Skin, S.C. All inter-company accounts and transactions between the entities have been eliminated in consolidation.

Translation of Foreign Currency Statements

We translate the financial statements of our foreign entities by using the current exchange rate. For assets and liabilities, the exchange rate at the balance sheet date is used. For any investment in subsidiaries and retained earnings, the historical exchange rate is used. For revenue, expenses, gains, and losses, an appropriately weighted average exchange rate for the period is used.

Use of Estimates

Management has made a number of estimates and assumptions relating to the reporting of revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual results could differ from those estimates.

Fair Value Measurements

Fair value measurement requirements are embodied in certain accounting standards applied in the preparation of our financial statements. Significant fair value measurements include our embedded derivative liabilities. See Note 4 — Stockholders Equity for disclosures related to our common stock and warrant financing arrangements. The fair value hierarchy is defined below:

Fair value hierarchy:

(1) Level 1 inputs are quoted prices in active markets for identical assets and liabilities.

(2) Level 2 inputs are inputs which include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the financial instrument.

(3) Level 3 inputs are unobservable inputs and significant to the fair value measurement.

 

The financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no financial instrument measured at fair value at March 31, 2012.

The summary of fair values of financial instruments is as follows at June 30, 2011:

 

                             
Instrument:   Fair value     Carrying
Value		     Level     Valuation
Methodology

Investments

   $ 350,000     $ 350,000       2     Market price

Derivative liabilities

   $ 27,341,284     $ 27,341,284       3     Black-Scholes
Dilution adjusted

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended March 31, 2012 and the year ended June 30, 2011:

 

                 
    March 31, 2012     June 30, 2011  

Beginning balance: Derivative liabilities

   $ 27,341,284     $ 18,567,450  

Total (gains) losses

     6,740,525       48,454,271  

Reclassification of liability to equity

     (16,478,071 )      —    

Purchases, sales, issuances and settlements, net

     (17,603,738 )      (39,680,437 ) 
   

 

 

    

 

 

  

Ending balance: Derivative liabilities

   $ —       $ 27,341,284  
   

 

 

    

 

 

  

Warrants issued with convertible debentures that we issued from November 2009 through February 2010 were amended effective December 29, 2011. The amendment removed certain price-based anti-dilution provisions which had resulted in the warrants being treated as liabilities and as a result the fair value of the warrants was reclassified to equity as of December 29, 2011. Warrants issued in association with a common stock financing in March and April of 2009 and which had expirations of March and April 2012 have all been exercised as of March 31, 2012 and as a result there is no derivative liability as of that date.

Cash and Cash Equivalents

We consider only our monetary liquid assets with original maturities of three months or less as cash and cash equivalents.

Accounts Receivable

Accounts receivable at March 31, 2012 consist primarily of credit card receivables including a holdback by the credit card processor. The holdback balance at March 31, 2012 was $500,000. Based on the Company’s verification process for customer credit cards and historical information available, management has determined that an allowance for doubtful accounts on credit card sales related to its direct and independent distributor sales as of March 31, 2012 is not necessary. No bad debt expense has been recorded for the three and nine months ended March 31, 2012 or the year ended June 30, 2011.

Investments

In 2008 we invested in auction rate preferred securities of closed-end funds (“ARPS”) to maximize interest income. As of March 31, 2012 all these investments have been sold.

 

Inventory

Inventory is stated at the lower of cost or market value. Cost is determined using the first-in, first-out method. We have capitalized payments to our contract product manufacturer for the acquisition of raw materials and commencement of the manufacturing, bottling and labeling of our product. As of March 31, 2012 and June 30, 2011, inventory consisted of:

 

                 
    March 31,
2012		     June 30,
2011		  

Finished goods

   $ 3,584,305     $ 736,103  

Raw materials

     3,396,215       1,388,560  
   

 

 

    

 

 

  

Total inventory

   $ 6,980,520     $ 2,124,663  
   

 

 

    

 

 

  

Revenue Recognition

We ship the majority of our product directly to the consumer via UPS and receive substantially all payment for these sales in the form of credit card charges. Revenue from direct product sales to customers is recognized upon passage of title and risk of loss to customers when product is shipped from the fulfillment facility. Sales revenue and estimated returns are recorded when product is shipped. Our return policy is to provide a 30-day money back guarantee on orders placed by customers. After 30 days, we do not issue refunds to direct sales customers for returned product. In the network marketing sales channel, we allow terminating distributors to return unopened unexpired product that they have purchased within the prior twelve months, subject to certain consumption limitations. To date, returns from terminating distributors have been negligible. Our return rate for sales directly to consumers and sales through our network channel are based on our historical experience which we analyze on a regular basis. As of March 31, 2012 and June 30, 2011, our reserve balance for returns and allowances was $764,894 and $435,135, respectively.

Income per share

Basic income or loss per share is computed by dividing the net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are computed by dividing net income by the weighted average common shares and potentially dilutive common share equivalents. For the three month period ended March 31, 2012 the effects of approximately 25 million common shares issuable upon exercise of warrants issued in our private placement offerings and options granted through our 2007 and 2010 Long-Term Incentive Plans are not included in computations because their effect was anti-dilutive. For the nine month period ended March 31, 2012 the effects of approximately 120,000 common shares, respectively, issuable upon exercise of options granted through our 2010 Long-Term Incentive Plans are not included in computations because their effect was anti-dilutive. For the three and nine month periods ended March 31, 2011 the effects of approximately 62 million common shares, respectively, issuable upon exercise of warrants issued in our private placement offerings, compensation based warrants issued and options granted through our 2007 and 2010 Long-Term Incentive Plans are not included in computations because their effect was anti-dilutive.

Segment Information

Our operations are aggregated into a single reportable operating segment based upon similar economic and operating characteristics as well as similar markets. Our operations are also subject to similar regulatory environments. We conduct our operations in the Americas which includes the U.S., Canada and Mexico and in Japan. Substantially all long-lived assets are located in the U.S. Revenues by geographic area are as follows:

 

                                 
    Three months ended March 31,     Nine months ended March 31,  
    2012     2011     2012     2011  

Americas operations

   $ 25,745,524     $ 8,150,636     $ 59,612,464     $ 19,223,278  

Japan operations

     10,466,091       1,824,588       21,966,508     $ 4,655,384  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total revenues

   $ 36,211,615     $ 9,975,224     $ 81,578,972     $ 23,878,662  
   

 

 

    

 

 

    

 

 

    

 

 

  

Research and Development Costs

We expense all costs related to research and development activities as incurred. Research and development expenses for the nine month periods ended March 31, 2012 and 2011 were $924,450 and $315,025, respectively.

Shipping and Handling

Shipping and handling costs associated with inbound freight and freight out to customers, including independent distributors, are included in cost of sales. Shipping and handling fees charged to all customers are included in sales.

 

Stock-Based Compensation

In certain circumstances, we issued common stock for invoiced services and in other similar situations to pay contractors and vendors. Payments in equity instruments to non-employees for goods or services are accounted for using the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, we have entered into certain other financial instruments and contracts, such as freestanding warrants and embedded conversion features on convertible debt instruments that are not afforded equity classification. These instruments are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.

Derivative financial instruments consist of financial instruments or other contracts that contain a notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

We estimate fair values of derivative financial instruments using various techniques that are considered to be consistent with the objective measurement of fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as freestanding warrants, we generally use the Black Scholes Merton option valuation technique, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, and risk free rates) necessary to fairly value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income or loss will reflect the volatility in changes to these estimates and assumptions.

As of March 31, 2012 all financial instruments subject to fair value treatment had been exercised or amended and we have no derivative instruments subject to fair value liability treatment.

Income Taxes

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three months ended March 31, 2012 and 2011 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 34% to pre-tax income primarily because of state income taxes, estimated permanent differences and change in valuation allowance.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

As of March 31, 2012 we have recognized a net income tax benefit of $250,806 which is our estimated federal and state income tax liability for the nine months ended March 31, 2012 combined with the income tax benefit resulting from the reduction in the valuation allowance in the previous quarter. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain. In December 2011, we determined it was more likely than not that the deferred tax asset would be realized and as a result we released the valuation allowance we had established resulting in a net benefit of $2,802,000 which represents the benefit expected to be realized in future years. As of March 31, 2012 the net deferred tax benefit was $2,712,000.

Effective January 1, 2009, we account for any uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, we are required to make subjective assumptions and judgments regarding income tax exposures. The result of the reassessment of our tax positions did not have an impact on the consolidated financial statements.

Concentration of Credit Risk

We disclose significant concentrations of credit risk regardless of the degree of such risk. Financial instruments with significant credit risk include cash and investments. At March 31, 2012, we had $11,249,095 in cash accounts at one financial institution, approximately $897,154 in foreign bank accounts and $5,000,120 in an investment management account at another financial institution. As of March 31, 2012 and June 30, 2011 the Company’s cash balances exceeded federally insured limits.

Effect of New Accounting Pronouncements

We have reviewed recently issued, but not yet effective, accounting pronouncements and do not believe any such pronouncements will have a material impact on our financial statements.