UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



ý	QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~DECEMBER 31, 2016~~

SEPTEMBER 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 001-35647

LIFEVANTAGE CORPORATION

(Exact name of Registrant as specified in its charter)



COLORADO		90-0224471
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

9785 S. Monroe Street, Ste 300, Sandy, UT 84070

(Address of principal executive offices)

(801) 432-9000

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨
		Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the issuer’s common stock, par value $0.001 per share, as of ~~February~~November 3, 2017 was ~~14,100,085.~~14,225,780.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, in particular "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," and the information incorporated by reference herein contains “forward-looking statements” (as such term is defined in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended). These statements, which involve risks and uncertainties, reflect our current expectations, intentions, or strategies regarding our possible future results of operations, performance, and achievements. Forward-looking statements include, without limitation: statements regarding future products or product development; statements regarding future selling, general and administrative costs and research and development spending; statements regarding the future performance of our network marketing efforts; statements regarding our expectations regarding ongoing litigation; statements regarding international growth; and statements regarding future financial performance, results of operations, capital expenditures and sufficiency of capital resources to fund our operating requirements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and applicable rules of the Securities and Exchange Commission and common law.

These forward-looking statements may be identified in this report and the information incorporated by reference by words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “plan”, “predict”, “project”, “should” and similar terms and expressions, including references to assumptions and strategies. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks, uncertainties, and contingencies, which could cause our actual results, performance, or achievements to differ materially from those expressed in, or implied by, such statements.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

~~Matters relating to our audit committee's independent review into sales of our products in certain international markets;~~

~~Non-compliance by our independent distributors with applicable legal requirements or our policies and procedures;~~

~~Potential adverse effects on our business and stock price due to ineffective internal controls;~~

~~Inability to manage financial reporting and internal control systems and processes and maintain appropriate level of internal control over financial reporting;~~

Inability to properly manage, motivate and retain our independent distributors or to attract new independent distributors on an ongoing basis;

Inability to manage existing markets, open new international markets or expand our operations;

Non-compliance by our independent distributors with applicable legal requirements or our policies and procedures;

Inability of new products and technological innovations to gain distributor or market acceptance;

Inability to execute our product launch process due to increased pressure on our supply chain, information systems and management;

Inability to appropriately manage our inventory;

Potential adverse effects on our business and stock price due to ineffective internal controls;

Inability to manage financial reporting and internal control systems and processes and maintain appropriate level of internal control over financial reporting;

Disruptions in our information technology systems;

Inability to protect against cyber security risks and to maintain the integrity of data;

Inability to comply with financial covenants imposed by our credit facility and the impact of debt service obligations and restrictive debt covenants;

International trade or foreign exchange restrictions, increased tariffs, foreign currency exchange fluctuations;

Deterioration of global economic conditions;

Inability to raise additional capital or complete desired acquisitions;

Exposure to environmental liabilities stemming from past operations and property ownership;

Dependence upon a few products for revenue;

High quality materials for our products may become difficult to obtain or expensive;

Dependence on third parties to manufacture our products;

Disruptions to the transportation channels used to distribute our products;

We may be subject to a product recall;

Unfavorable publicity on our business or products;

Our direct selling program could be found to not be in compliance with current or newly adopted laws or regulations in various markets;

Legal proceedings may be expensive and time consuming;

Strict government regulations on our business;

Regulations governing the production or marketing of our skin care products;

Risk of investigatory and enforcement action by the Federal Trade Commission;

Government authorities may question our tax positions or transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business;

Failure to comply with anti-corruption laws;

Inability to build and integrate our new management team could harm our business;

Loss of, or inability to attract, key personnel;

We may be held responsible for certain taxes or assessments relating to the activity of our independent distributors;

Competition in the dietary supplement market;

Our inability to protect our intellectual property rights;

Third party claims that we infringe on their intellectual property;

Product liability claims against us;

Economic, political, foreign exchange and other risks associated with international operations;

Potential delisting of our common stock due to non-compliance with Nasdaq's continued listing requirements;

~~Inability to raise future capital when needed or complete desired acquisitions;~~

Volatility of the market price of our common stock;

Substantial sales of shares may negatively impact the market price of our common stock; and

Dilution of outstanding ~~voting~~common shares may occur if holders of our existing ~~warrants and~~ options exercise their securities ~~for shares of common stock and~~or upon future vesting of ~~Performance Stock Units.~~

performance restricted stock units.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. Except as required by law, we have no obligation and do not undertake to update or revise any such forward-looking statements to reflect events or circumstances after the date of this report.

LIFEVANTAGE CORPORATION

INDEX




		PAGE
PART I. Financial Information		5
Item 1.	Financial Statements:	5
	Condensed Consolidated Balance Sheets (unaudited)	5
	Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited)	6
	Condensed Consolidated Statement of Stockholders’ Equity (unaudited)	7
	Condensed Consolidated Statements of Cash Flows (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1917
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2624
Item 4.	Controls and Procedures	2725

PART II. Other Information		2825
Item 1.	Legal Proceedings	2825
Item 1A.	Risk Factors	2825
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2925
Item 3.	Defaults Upon Senior Securities	2925
Item 4.	Mine Safety Disclosures	2925
Item 5.	Other Information	2926
Item 6.	Exhibits	2926
Signatures		3027

PART II. Financial Information

Item 1. Financial Statements

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	As of,
	December 31, 2016			June 30, 2016			September 30, 2017			June 30, 2017
(In thousands, except per share data)
ASSETS
Current assets
Cash and cash equivalents	$	11,731		$	7,883		$	12,288		$	11,458
Accounts receivable	717			1,552			1,661			1,334
Income tax receivable	903			—			472			913
Inventory, net	21,377			25,116			15,360			16,575
Current deferred income tax asset	—			2,776
Prepaid expenses and deposits	1,993			5,082			4,253			5,266
Total current assets	36,721			42,409			34,034			35,546

Property and equipment, net	2,885			3,456			3,990			3,127
Intangible assets, net	1,698			1,744			1,214			1,247
Long-term deferred income tax asset	3,906			1,130			4,210			4,087
Other long-term assets	1,305			1,520			1,345			1,242
TOTAL ASSETS	$	46,515		$	50,259		$	44,793		$	45,249

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	5,037		$	8,891		$	3,154		$	4,850
Commissions payable	6,722			7,719			6,334			6,837
Income tax payable	—			1,206			175			215
Other accrued expenses	9,780			8,734			10,471			9,453
Current portion of long-term debt	2,000			2,000			2,000			2,000
Total current liabilities	23,539			28,550			22,134			23,355

Long-term debt
Principal amount	6,500			7,500			5,000			5,500
Less: unamortized discount and deferred offering costs	(76		)	(91		)	(52		)	(60		)
Long-term debt, net of unamortized discount and deferred offering costs	6,424			7,409			4,948			5,440
Other long-term liabilities	2,041			2,169			1,939			1,927
Total liabilities	32,004			38,128			29,021			30,722
Commitments and contingencies - Note 6
Stockholders’ equity
Preferred stock — par value $0.001 per share, 50,000 shares authorized, no shares issued or outstanding	—			—			—			—
Common stock — par value $0.001 per share, 250,000 shares authorized and 14,054 and 14,028 issued and outstanding as of December 31, 2016 and June 30, 2016, respectively	14			14
Common stock — par value $0.001 per share, 250,000 shares authorized and 14,228 and 14,232 issued and outstanding as of September 30, 2017 and June 30, 2017, respectively							14			14
Additional paid-in capital	121,165			120,150			122,007			121,599
Accumulated deficit	(106,613		)	(108,076		)	(106,175		)	(106,992		)
Accumulated other comprehensive income (loss)	(55		)	43
Accumulated other comprehensive loss							(74		)	(94		)
Total stockholders’ equity	14,511			12,131			15,772			14,527
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	46,515		$	50,259		$	44,793		$	45,249

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)


	For the Three Months Ended December 31,						For the Six Months Ended December 31,						Three Months Ended September 30,
	2016			2015			2016			2015			2017			2016
(In thousands, except per share data)
Revenue, net	$	48,947		$	51,995		$	103,841		$	97,347		$	49,127		$	54,894
Cost of sales	7,500			7,842			16,332			14,817			8,739			8,832
Gross profit	41,447			44,153			87,509			82,530			40,388			46,062
Operating expenses:
Commissions and incentives	23,540			27,297			49,836			49,340			23,409			26,296
Selling, general and administrative	17,207			13,824			34,987			27,487			15,581			17,780
Total operating expenses	40,747			41,121			84,823			76,827			38,990			44,076
Operating income	700			3,032			2,686			5,703			1,398			1,986
Other income (expense):
Other expense:
Interest expense	(138		)	(619		)	(275		)	(1,368		)	(162		)	(137		)
Other income (expense), net	(150		)	6			(321		)	(210		)	22			(171		)
Total other income (expense)	(288		)	(613		)	(596		)	(1,578		)
Total other expense													(140		)	(308		)
Income before income taxes	412			2,419			2,090			4,125			1,258			1,678
Income tax expense	(129		)	(819		)	(627		)	(1,459		)	(441		)	(498		)
Net income	$	283		$	1,600		$	1,463		$	2,666		$	817		$	1,180
Net income per share:
Basic	$	0.02		$	0.12		$	0.11		$	0.19		$	0.06		$	0.09
Diluted	$	0.02		$	0.11		$	0.10		$	0.19		$	0.06		$	0.08
Weighted-average shares outstanding:
Basic	13,840			13,718			13,830			13,714			13,963			13,820
Diluted	14,132			14,016			14,176			13,952			14,080			14,466
Other comprehensive income (loss), net of tax:
Other comprehensive income, net of tax:
Foreign currency translation adjustment	(189		)	9			(98		)	26			20			91
Other comprehensive income (loss), net of tax	$	(189	)	$	9		$	(98	)	$	26
Other comprehensive income, net of tax													$	20		$	91
Comprehensive income	$	94		$	1,609		$	1,365		$	2,692		$	837		$	1,271

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock				Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total			Common Stock				Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total			Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
(In thousands)
Balances, June 30, 2016	14,028		$	14	$	120,150	$	(108,076	)	$	43		$	12,131
Balances, June 30, 2017																14,232		$	14	$	121,599	$	(106,992	)	$	(94	)	$	14,527
Stock-based compensation	—		—		1,008		—			—			1,008			—		—		408		—			—			408
Exercise of options and warrants	29		—		7		—			—			7
Issuance of shares related to restricted stock	19		—		—		—			—			—
Shares canceled or surrendered as payment of tax withholding	(22	)	—		—		—			—			—			(4	)	—		—		—			—			—
Currency translation adjustment	—		—		—		—			(98		)	(98		)	—		—		—		—			20			20
Net income	—		—		—		1,463			—			1,463			—		—		—		817			—			817
Balances, December 31, 2016	14,054		$	14	$	121,165	$	(106,613	)	$	(55	)	$	14,511
Balances, September 30, 2017																14,228		$	14	$	122,007	$	(106,175	)	$	(74	)	$	15,772

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended December 31,						Three Months Ended September 30,
	2016			2015			2017			2016
(In thousands)
Cash Flows from Operating Activities:
Net income	$	1,463		$	2,666		$	817		$	1,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	826			983			350			412
Stock-based compensation	1,515			580			623			939
Amortization of deferred financing fees	6			229			3			3
Amortization of debt discount	9			178			5			5
Deferred income tax	—			37			(123		)	—
Changes in operating assets and liabilities:
Increase in receivables	(448		)	(728		)
Decrease / (increase) in inventory	3,366			(1,426		)
Decrease in prepaid expenses and deposits	3,062			545
Decrease in long-term assets	72			223
(Decrease) / increase in accounts payable	(3,791		)	674
Increase in accrued expenses	135			3,072
(Decrease) / increase in other long-term liabilities	(1,115		)	1,473
Accounts receivable							(332		)	261
Income tax receivable							441			(133		)
Inventory, net							1,236			1,249
Prepaid expenses and deposits							954			1,223
Other long-term assets							(44		)	111
Accounts payable							(1,702		)	(1,167		)
Income tax payable							(40		)	(1,206		)
Other accrued expenses							349			1,074
Other long-term liabilities							(34		)	(1,071		)
Net Cash Provided by Operating Activities	5,100			8,506			2,503			2,880
Cash Flows from Investing Activities:
Purchase of equipment	(237		)	(333		)	(1,176		)	(94		)
Net Cash Used in Investing Activities	(237		)	(333		)	(1,176		)	(94		)
Cash Flows from Financing Activities:
Excess tax benefit from stock-based compensation	—			405
Payment on term loan	(1,000		)	(6,813		)	(500		)	(500		)
Exercise of options and warrants	7			84			—			5
Net Cash Used in Financing Activities	(993		)	(6,324		)	(500		)	(495		)
Foreign Currency Effect on Cash	(22		)	65			3			51
Increase in Cash and Cash Equivalents:	3,848			1,914			830			2,342
Cash and Cash Equivalents — beginning of period	7,883			13,905			11,458			7,883
Cash and Cash Equivalents — end of period	$	11,731		$	15,819		$	12,288		$	10,225
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	233		$	954		$	94		$	120
Cash paid for income taxes	$	1,682		$	1,026		$	164		$	2,162

The accompanying notes are an integral part of these condensed consolidated financial statements.

LIFEVANTAGE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

These unaudited ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements and ~~Notes~~notes should be read in conjunction with the audited financial statements and notes of LifeVantage Corporation (the “Company”) as of and for the year ended June 30, ~~2016~~2017 included in ~~our Annual Report~~the annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on ~~December 12, 2016.~~September 7, 2017.

Note 1 — Organization and Basis of Presentation

LifeVantage Corporation is a company focused on bio-hacking the aging code through nutrigenomics, the study of how nutrition and naturally occurring compounds affect our genes. The Company is dedicated to helping people achieve their health, wellness and financial independence goals. ~~We provide~~The Company provides quality, scientifically-validated products and a financially rewarding direct sales business opportunity to preferred customers, retail customers and independent distributors who seek a healthy lifestyle and financial freedom. ~~We sell our~~The Company sells its products ~~to preferred customers, retail customers and independent distributors located~~ in the United States, Japan, Hong Kong, Australia, Canada, ~~Philippines,~~ Mexico, Thailand, the United Kingdom, the Netherlands and ~~the Netherlands.~~Germany.

~~We engage~~The Company engages in the identification, research, development and distribution of advanced nutraceutical dietary supplements and skin care products, including ~~Protandim~~^®Protandim®, ~~our~~its line of scientifically-validated dietary ~~supplement, LifeVantage TrueScience~~^®supplements, TrueScience®, ~~our~~its line of anti-aging skin care products, ~~Canine Health~~^®~~, our~~Petandim™ for Dogs, its companion pet supplement formulated to combat oxidative stress in dogs, ~~Axio~~^®Axio®, ~~our energy drink~~its Smart Energy Drink mixes, and ~~PhysIQ~~^™PhysIQ™, ~~our smart weight management system.~~its Smart Weight Management System.

The condensed consolidated financial statements included herein have been prepared by the Company’s management, without audit, pursuant to the rules and regulations of the SEC. In the opinion of the Company’s management, these interim financial statements include all adjustments ~~consisting of normal recurring adjustments,~~ that are considered necessary for a fair presentation of its financial position as of ~~December 31, 2016,~~September 30, 2017, and the results of operations for the three ~~and six~~ months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015, respectively,~~ and the cash flows for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015, respectively.~~2016. Interim results are not necessarily indicative of results for a full year or for any future period. Certain amounts in the prior year financial statements have been reclassified for comparative purposes in order to conform with current year presentation.

The condensed consolidated financial statements and notes included herein are presented as required by Form 10-Q, and do not contain certain information included in the Company’s audited financial statements and notes for the fiscal year ended June 30, ~~2016~~2017 pursuant to the rules and regulations of the SEC. For further information, refer to the financial statements and notes thereto as of and for the year ended June 30, ~~2016,~~2017, and included in the ~~Annual Report~~annual report on Form 10-K on file with the SEC.

Note 2 — Summary of Significant Accounting Policies

Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

~~We prepare our~~The Company prepares the condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing these statements, ~~we are~~the Company is required to use estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates and assumptions. On an ongoing basis, ~~we review our~~the Company reviews its estimates, including those related to inventory valuation and obsolescence, sales returns, income taxes and tax valuation reserves, share-based compensation and loss contingencies.

~~Translation of~~ Foreign Currency ~~Statements~~Translation

A portion of the Company’s business operations occurs outside the United States. The local currency of each of the Company’s subsidiaries is generally its functional currency. All assets and liabilities are translated into U.S. dollars at exchange rates existing at the balance sheet dates, revenue and expenses are translated at weighted-average exchange rates and stockholders’ equity is recorded at historical exchange rates. The resulting foreign currency translation adjustments are recorded as a separate component of stockholders’ equity in the condensed consolidated balance sheets and as a component of comprehensive income. Transaction gains and losses ~~and currency translation gains and losses on intercompany balances denominated in a foreign currency~~ are included in other income (expense), net in the condensed consolidated statements of

operations and comprehensive income. For the three months ended ~~December 31,~~September 30, 2017 and 2016, a net foreign

currency gain of $0.1 million and ~~2015,~~a net foreign currency ~~losses~~loss of ~~$0.3 million and $4,000, respectively, are recorded in other income (expense), net. For the six months ended December 31, 2016 and 2015, net foreign currency losses of $0.4 million and $0.2~~$0.1 million, respectively, are recorded in other income (expense), net.

Derivative Instruments and Hedging Activities

The Company's subsidiaries enter into transactions with each other which may not be denominated in the respective subsidiaries' functional currencies. The Company seeks to reduce its exposure to fluctuations in foreign exchange rates through the use of derivatives. The Company does not use such derivative financial instruments for trading or speculative purposes.

To hedge risks associated with the foreign-currency-denominated intercompany transactions, the Company entered into forward foreign exchange contracts which were settled in ~~December 2016~~September 2017 and were not designated for hedge accounting. For the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015, realized gains of $0.2 million and $2,000, respectively, related to forward contracts, are recorded in other income (expense), net. For the six months ended December 31, 2016 and 2015,~~ a realized gain of ~~$0.1 million~~$3,000 and a realized loss of ~~$7,000,~~$0.1 million, respectively, related to forward contracts, are recorded in other income (expense), net. The Company did not hold any derivative instruments at ~~December 31, 2016~~September 30, 2017.

Cash and Cash Equivalents

The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents.

Concentration of Credit Risk

Accounting guidance for financial instruments requires disclosure of significant concentrations of credit risk regardless of the degree of such risk. Financial instruments with significant credit risk include cash and investments. At ~~December 31, 2016~~September 30, 2017, the Company had $~~8.4~~8.5 million in cash accounts ~~that were held primarily~~ at one financial institution and $~~3.3~~3.8 million in accounts at other financial institutions. As of ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016~~2017, and during the periods then ended, the Company’s cash balances exceeded federally insured limits.

Accounts Receivable

The Company’s accounts receivable as of ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016~~2017 consist primarily of credit card receivables. 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 customer sales as of ~~December 31, 2016~~September 30, 2017 is not necessary. No bad debt expense has been recorded for the ~~periods~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~December 31, 2015~~.2016.

Inventory

As of ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016~~2017, inventory consisted of (in thousands):


	December 31, 2016		June 30, 2016		September 30, 2017		June 30, 2017
Finished goods	$	10,663	$	14,852	$	7,422	$	7,817
Raw materials	10,714		10,264		7,938		8,758
Total inventory	$	21,377	$	25,116	$	15,360	$	16,575

Inventories are carried and depicted above at the lower of cost or ~~net realizable value,~~market, using the first-in, first-out method, which includes a reduction in inventory values of ~~$0.6~~$1.1 million and ~~$0.4~~$0.9 million at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016,~~2017, respectively, related to obsolete and slow-moving inventory.

Revenue Recognition

The Company ships the majority of its product directly to the consumer and receives substantially all payment for these sales in the form of credit card receipts. Revenue from direct product sales to customers is recognized upon shipment, which is when passage of title and risk of loss occurs. Estimated returns are recorded when product is shipped. Subject to some exceptions based on local regulations, the Company’s return policy is to provide a full refund for product returned within 30 days if the returned product is unopened or defective. After 30 days, the Company generally does not issue refunds to direct sales customers for returned product. The Company allows terminating distributors to return up to 30% of unopened, unexpired product that they have purchased within the prior twelve months for a full refund, less a 10% restocking fee. The Company establishes the returns reserve based on historical experience. The returns reserve is evaluated on a quarterly basis. As of

~~December 31, 2016~~September 30, 2017 and June 30, ~~2016~~2017, the Company’s reserve balance for returns and allowances was ~~approximately~~$0.3 million and $0.4 million ~~and~~ ~~$0.3 million~~, 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 customers are included in sales.

Research and Development Costs

The Company expenses all costs related to research and development activities, as incurred. Research and development expenses for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015~~2016 were ~~approximately $0.6~~$0.3 million and $~~0.5~~0.3 million, respectively.

Stock-Based Compensation

The Company recognizes stock-based compensation by measuring the cost of services to be rendered based on the grant date fair value of the equity award. The Company recognizes stock-based compensation, net of any estimated forfeitures, over the period an employee is required to provide service in exchange for the award, generally referred to as the requisite service period. For awards with market-based performance conditions, the cost of the awards is recognized as the requisite service is rendered by employees, regardless of when, if ever, the market-based performance conditions are satisfied.

The Black-Scholes option pricing model is used to estimate the fair value of stock options. The determination of the fair value of stock options is affected by the Company's stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The Company uses historical volatility as the expected volatility assumption required in the Black-Scholes model. The Company utilizes a simplified method for estimating the expected life of the options. The Company uses this method because it believes that it provides a better estimate than the Company’s historical data as post vesting exercises have been limited. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the stock options.

The fair value of restricted stock grants is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield. The fair value of performance restricted stock units that include market-based performance conditions is based on the closing market price of the Company's stock on the date of grant less the Company's expected dividend yield, with further adjustments made to reflect the market conditions that must be satisfied in order for the units to vest by using a Monte-Carlo simulation model. Key assumptions for the Monte-Carlo simulation model include the risk-free rate, expected volatility, expected dividends and the correlation coefficient. The fair value of cash-settled performance-based awards, accounted for as liabilities, is remeasured at the end of each reporting period and is based on the closing market price of the Company’s stock on the last day of the reporting period. The Company recognizes compensation costs for awards with performance conditions when it concludes it is probable that the performance conditions will be achieved. The Company reassesses the probability of vesting at each balance sheet date and adjusts compensation costs accordingly.

~~Reverse Stock Split~~

In October 2015, following approval of the Company's shareholders, the Company's board of directors approved the filing of an amendment to the Company's amended and restated articles of incorporation to effectuate a reverse split of the issued and outstanding shares of the Company's common stock on a one-for-seven basis. The reverse stock split was effective on October 19, 2015. The par value and authorized number of shares of common stock were not adjusted as a result of the reverse split. All fractional shares resulting from the reverse stock split were rounded up. All issued and outstanding common stock and per share amounts contained within the Company's consolidated financial statements and footnotes have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using statutory tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the effective date of the change. The Company recognizes tax liabilities or benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized would be the largest liability or benefit that the Company believes has greater than a 50% likelihood of being realized upon settlement.

For the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015~~2016, the Company recognized income tax expense of ~~$0.6~~$0.4 million and $~~1.5~~0.5 million, respectively, which is reflective of the Company’s current estimated federal, state and foreign effective tax rate. Realization of deferred tax assets is dependent upon future earnings in specific tax jurisdictions, the timing and amount of

which are uncertain. The Company continues to evaluate the realizability of the deferred tax asset based upon achieved and estimated future results. The difference between the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 effective rate of ~~30.0%~~35.1% and the Federal statutory rate of 35.0% is due primarily to the effect of ~~certain permanent differences,~~ discrete items, return to provision adjustments, permanent items and benefits from ~~our~~the permanent reinvestment assertion.

Income Per Share

Basic income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period, less unvested restricted stock awards. Diluted income per common share is computed by dividing net income by the weighted-average common shares and potentially dilutive common share equivalents using the treasury stock method.

~~For the three and six months ended~~ ~~December 31, 2016~~ ~~the~~

The effects of approximately ~~0.1~~0.2 million and ~~43,000~~46,000 common shares ~~respectively,~~ issuable upon exercise of options and non-vested shares of restricted stock ~~granted pursuant to the Company’s 2007~~outstanding as of September 30, 2017 and ~~2010 Long-Term Incentive Plans~~2016, respectively, are not included in computations ~~because~~as their effect was anti-dilutive. ~~For the three and six months ended~~ ~~December 31, 2015~~ the effects of approximately 0.2 million and 0.2 million common shares, respectively, issuable upon exercise of options granted pursuant to the Company’s 2007 and 2010 Long-Term Incentive Plans were not included in computations because their effect was anti-dilutive.

The following is a reconciliation of net income per share and the weighted-average common shares outstanding for purposes of computing basic and diluted net income per share (in thousands except per share amounts):


	For the Three Months Ended December 31,				For the Six Months Ended December 31,				Three Months Ended September 30,
	2016		2015		2016		2015		2017		2016
Numerator:
Net income	$	283	$	1,600	$	1,463	$	2,666	$	817	$	1,180
Denominator:
Basic weighted-average common shares outstanding	13,840		13,718		13,830		13,714		13,963		13,820
Effect of dilutive securities:
Stock awards and options	250		227		302		171		117		601
Warrants	42		71		44		67		—		45
Diluted weighted-average common shares outstanding	14,132		14,016		14,176		13,952		14,080		14,466
Net income per share, basic	$	0.02	$	0.12	$	0.11	$	0.19	$	0.06	$	0.09
Net income per share, diluted	$	0.02	$	0.11	$	0.10	$	0.19	$	0.06	$	0.08

Segment Information

The Company operates in a single operating segment by selling products to an international network of independent distributors that operates in an integrated manner from market to market. Commissions and incentives expenses are the Company’s largest expense comprised of the commissions paid to its independent distributors. The Company manages its business primarily by managing its international network of independent distributors. The Company does not use profitability reports on a regional or divisional basis for making business decisions. However, the Company does report revenue in two geographic regions: the Americas region and the Asia/Pacific & Europe region. Revenues by geographic region are as follows (in thousands):


	For the Three Months Ended December 31,				For the Six Months Ended December 31,				Three Months Ended September 30,
	2016		2015		2016		2015		2017		2016
Americas	$	37,613	$	40,055	$	77,748	$	74,781	$	36,163	$	40,135
Asia/Pacific & Europe	11,334		11,940		26,093		22,566		12,964		14,759
Total revenues	$	48,947	$	51,995	$	103,841	$	97,347	$	49,127	$	54,894

Additional information as to the Company’s revenue from operations in the most significant geographical areas is set forth below (in thousands):


	For the Three Months Ended December 31,				For the Six Months Ended December 31,				Three Months Ended September 30,
	2016		2015		2016		2015		2017		2016
United States	$	35,535	$	38,761	$	74,153	$	72,257	$	34,115	$	38,618
Japan	$	9,498	$	9,220	$	20,105	$	17,813	$	10,856	$	10,607

As of ~~December 31, 2016~~September 30, 2017, long-lived assets were $~~6.6~~8.3 million in the United States and $~~1.0~~0.9 million in Japan. As of June 30, ~~2016~~2017, long-lived assets were $~~4.2~~6.2 million in the United States and $~~1.3~~0.9 million in Japan.

Effect of New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ~~(FASB)~~("FASB") issued Accounting Standards ~~Codification (ASC) 606,~~Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), ~~which supersedes the revenue recognition requirements in ASC 605,~~and has subsequently issued ASU 2015-14, Revenue ~~Recognition. The core principle~~from Contracts with Customers (Topic 606): Deferral of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration it expects to receive in exchange for those goods or services. ASC 606 will be effective for the Company in the first quarter of fiscal 2019. The Company has performed a detailed analysis and does not anticipate that ASC 606 will have a significant impact on revenue recognition or its consolidated financial statements due to the types of revenue transactions that the Company enters into.Effective Date

~~Subsequent to the release of the updated revenue recognition standard discussed above, FASB issued Accounting Standards Update (ASU)~~, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815),, ASU 2016-12, Revenue from Contracts with Customers ~~(Topic~~

(Topic 606): Narrow-Scope Improvements and Practical ExpedientsandASU 2016-20,, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with ~~Customers.~~Customers ~~These updates are intended~~(collectively, Topic 606).

Topic 606 outlines a single comprehensive model for entities to ~~improve the operability~~use in accounting for revenue arising from contracts with customers and ~~understandability~~supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the ~~implementation~~new guidance is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance is effective for the ~~updated revenue standard~~Company beginning on July 1, 2018 with the option to adopt using either a full retrospective or a modified retrospective approach. The Company expects to adopt Topic 606 using the modified retrospective approach, under which the cumulative effect of initially applying Topic 606 is recognized as ~~it relates~~an adjustment to the ~~subjects noted. The amendments~~opening balance of retained earnings in these updates have the same effective date as ASC 606 as noted above, and the Company does not anticipate that these updates will have a significant impact on its revenue recognition policy or its consolidated financial statements.

~~In November 2015, FASB issued ASU No. 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.~~ Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that all deferred tax assets or liabilities be classified as noncurrent in the classified statement of financial position. The Company early adopted this update prospectively during the first quarter of fiscal ~~2017, which resulted~~2019.

The Company is concluding the assessment phase of implementing this guidance. The Company has evaluated each of its revenue streams and has identified similar performance obligations under Topic 606 as compared to current revenue recognition guidance. As a result, the Company expects that the timing of the recognition of revenue will remain materially unchanged compared to the current guidance.

There are also considerations related to internal control over financial reporting associated with implementing Topic 606. The Company is currently evaluating its control framework for revenue recognition and identifying any changes that may need to be made in response to the new guidance. Disclosure requirements under Topic 606 have been expanded compared to the disclosure requirements under the current guidance. The Company is currently in the ~~reclassification~~process of designing and implementing the ~~deferred taxes from current to noncurrent on~~appropriate controls over gathering and reporting the ~~balance sheet. Prior period balances were not retrospectively adjusted.~~information required under Topic 606.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 841). For lessees, the amendments in this update require that for all leases not considered to be short term, a company recognize both a lease liability and right-of-use asset on its balance sheet, representing the obligation to make payments and the right to use or control the use of a specified asset for the lease term. The amendments in this update are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company is currently evaluating the impact that this amendment will have on its consolidated financial statements.

In ~~March 2016,~~May 2017, FASB issued ASU ~~2016-09,~~No. 2017-09, Compensation - Stock Compensation (Topic 718): ~~Improvements to Employee Share-Based Payment Accounting.~~Scope of Modification Accounting. The amendments in this update ~~involve several aspects~~provide guidance about which changes to the terms or conditions of a share-based award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting ~~for share-based compensation transactions, including~~under the ~~income tax consequences, forfeitures, statutory withholding requirements and cash flow classification for applicable transactions,~~amendments in ~~an effort to reduce costs and complexity associated with these transactions while maintaining the usefulness of financial information. Prior to~~this update. The amendments in this update are effective for all ~~excess tax benefits were recognized~~annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The amendments in ~~additional paid in capital ("APIC") and accumulated in~~this update should be applied prospectively to an ~~APIC pool and any tax deficiencies realized were offset against~~award modified on or after the APIC pool to the extent available, with any excess amounts recognized in the income statement. Under this new amendment, any excess tax benefits or deficiencies resulting from the exercise, vesting or settlement of share-based payment transactions will be recognized in the income statement as tax benefits or expenses prospectively from the date of adoption. Estimating forfeitures as part of the recognition of compensation costs is no longer required, rather, an entity can make the election to account for forfeitures when they occur.adoption date. The Company ~~early adopted~~will apply this ~~update during~~amendment to any award modifications made on or after the ~~first quarter of~~adoption date.

~~fiscal 2017 and began recording the excess tax benefits to the income statement. The Company elected to continue estimating forfeitures as part of its share-based compensation accounting policy.~~

Note 3 — Long-Term Debt

On ~~October 18, 2013, the Company entered into a Financing Agreement providing for a term loan facility in an aggregate principal amount of~~ ~~$47 million~~ ~~(the “October 2013 Term Loan”) and a delayed draw term loan facility in an aggregate principal amount not to exceed~~ ~~$20 million~~ (the “October 2013 Delayed Draw Term Loan”). The October 2013 Delayed Draw Term Loan was available for borrowing in specified minimum amounts from time to time beginning after the effective date of the Financing Agreement until ~~October 18, 2014. The Company did not borrow any amounts under the October 2013 Delayed Draw Term Loan.~~

On May 1, 2015, the Company entered into an Amendment No. 1 to Financing Agreement ("Amendment No. 1"). Amendment No. 1 revised the March 31, 2015 and June 30, 2015 consolidated EBITDA covenants from $20.6 million and $21.3 million, respectively, to $17.0 million for each quarter end. Amendment No. 1 also revised the minimum unrestricted cash and cash equivalents that the Company was required to hold from $10.0 million to $8.0 million for the reporting periods ended March 31, 2015 and June 30, 2015. In addition, Amendment No. 1 required that the Company make certain accelerated principal payments on the October 2013 Term Loan totaling $4.5 million during the fourth quarter of fiscal year 2016.

On August 27, 2015, the Company entered into an Amendment No. 2 to Financing Agreement ("Amendment No. 2" and collectively, with the October 2013 Term Loan, as previously amended by Amendment No. 1, the "October 2013 Credit Facility"). Amendment No. 2 revised the covenants related to minimum consolidated EBITDA (as defined in the amended Financing Agreement) for the four consecutive fiscal quarters ending September 30, 2015, December 31, 2015, March 31, 2016 and June 30, 2016 from $22.2 million, $23.1 million, $24.4 million and $25.6 million, respectively, to $14.5 million, $15.0 million, $17.0 million and $17.5 million, respectively. In addition, Amendment No. 2 required that the Company make additional monthly accelerated principal payments on the October 2013 Term Loan in the amount of $0.5 million commencing on October 15, 2015 and continuing until the Term Loan was paid in full. Amendment No. 2 also required that the Company make additional accelerated payments at the end of each fiscal quarter in the amount of all unrestricted cash on hand as of the close of business on the last day of the quarter in excess of $12.5 million.

~~The principal amount of the October 2013 Term Loan was payable in consecutive quarterly installments beginning with the calendar quarter ended~~ ~~March 31, 2014~~ ~~and matured on the earlier of~~ ~~October 18, 2018~~ or such date as the outstanding loans became payable in accordance with the terms of the Financing Agreement (the “Final Maturity Date”). The October 2013 Term loan bore interest at a rate equal to ~~7.5%~~ ~~per annum plus the greater of (i)~~ ~~1.25%~~ ~~or (ii) LIBOR, or at the Company’s option, a reference rate (as defined in the Financing Agreement) plus~~ ~~6.5%~~ per annum, with such interest payable monthly. For the six months ended December 31, 2016, the average interest rate was 8.75%. On March 30, 2016, the Company repaid the full amount outstanding under the October 2013 Term Loan and terminated the October 2013 Credit Facility.

On March 30, 2016, the Company entered into a ~~Loan Agreement~~loan agreement (the “March 2016 Loan Agreement”) to refinance its then outstanding ~~debt under the October 2013 Term Loan.~~debt. In connection with the March 2016 Loan Agreement and on the same date, the Company entered into a ~~Security Agreement~~security agreement (the ~~“March 2016 Security~~“Security Agreement”). The March 2016 Loan Agreement provides for a term loan in an aggregate principal amount of $10.0 million (the “March 2016 Term Loan") and a revolving loan facility in an aggregate principal amount not to exceed $2.0 million (the “March 2016 Revolving Loan,” and collectively with the March 2016 Term Loan, the March 2016 Loan Agreement and the ~~March 2016~~ Security Agreement, the “March 2016 Credit Facility”).

The principal amount of the March 2016 Term Loan is payable in consecutive quarterly installments in the amount of $0.5 million plus accrued interest beginning with the fiscal quarter ended June 30, 2016 and maturing on March 30, 2019 (the “Maturity Date”). The March 2016 Term Loan bears interest at a fixed rate of 4.93%. If the Company borrows under the March 2016 Revolving Loan, interest will be payable quarterly in arrears on the last day of each fiscal quarter at a variable rate equal to the 30 day LIBOR Rate plus 3.50%.

The Company’s obligations under the March 2016 Credit Facility are secured by a security interest in substantially all of the Company’s assets. Loans outstanding under the March 2016 Credit Facility 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 March 2016 Revolving Loan exceeds $2.0 million, the Company must prepay an amount equal to such excess. Any principal amount of the March 2016 Term Loan which is prepaid or repaid may not be re-borrowed.

The March 2016 Credit Facility contains customary covenants, including affirmative and negative covenants that, among other things, restrict the Company’s 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 equity interests in the Company, 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 the Company’s assets. The March 2016 Credit Facility also contains various financial covenants that require the Company to maintain a certain consolidated minimum tangible net worth, minimum working capital amounts, and ~~certain~~ debt to EBITDA and fixed charge coverage ratios. Additionally, the March 2016 Credit Facility contains cross-default provisions, whereby a default under the terms of certain indebtedness or an uncured default of a payment or other material obligation of the Company under a material contract of the Company will cause a default on the remaining indebtedness under the March 2016 Credit Facility. As of ~~December 31, 2016,~~September 30, 2017, the Company was in compliance with all applicable covenants under the March 2016 Credit Facility; provided, however, that on October 24, 2016, the Company was granted a waiver and extension to covenants requiring the Company to provide the lender with audited financial statements for the Company's 2016 fiscal year on or before October 28, 2016. Under the limited waiver and extension, the lender agreed to waive compliance with this requirement if the Company delivered such audited financial statements prior to December 31, 2016. In connection with the filing of the Company's Form 10-K on December 12, 2016, the Company delivered all required information to the lender to satisfy the requirement.

~~During the six months ended December 31, 2016, the Company recorded interest expense of $16,000 related to the normal amortization of transaction costs associated with the March 2016 Credit~~ Facility. At December 31, 2016, the Company had unamortized transaction costs totaling $0.1 million included in the consolidated balance sheet related to the March 2016 Credit Facility. This balance will be amortized to interest expense using the effective interest method over the term of the loan.

The Company’s book value for the March 2016 Credit Facility approximates the fair value. Aggregate future principal payments required in accordance with the terms of the March 2016 Credit Facility are as follows (in thousands):


Fiscal Year Ending June 30,	Amount		Amount
2017 (remaining six months ending June 30, 2017)	$	1,000
2018	2,000
2018 (remaining nine months ending June 30, 2018)			$	1,500
2019	5,500		5,500
	$	8,500	$	7,000

Note 4 — Stockholders’ Equity

During the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017, the Company ~~issued 10,000 and 19,000~~did not issue shares ~~respectively,~~ of restricted stock ~~and 1,000 and 29,000~~or shares ~~respectively,~~ of common stock upon the exercise of warrants and options. During the three ~~and six~~ months ended ~~December 31, 2016, 16,000 and 22,000~~September 30, 2017, 4,000 shares ~~respectively,~~ of restricted stock were canceled or surrendered as payment of tax withholding upon vesting.

The Company’s Articles of Incorporation authorize the issuance of preferred shares. However, as of ~~December 31, 2016~~September 30, 2017, none have been issued and no rights or preferences have been assigned to the preferred shares by the Company’s ~~Board~~board of ~~Directors.~~directors.

Note 5 — ~~Stock-based~~Stock-Based Compensation

Long-Term Incentive Plans

The Company adopted and the shareholders approved the 2007 Long-Term Incentive Plan (the “2007 Plan”), effective November 21, 2006, to provide incentives to ~~certain~~ eligible employees, directors and consultants. A maximum of 1.4 million shares of the Company's common stock can be issued under the 2007 Plan in connection with the grant of awards. Awards to purchase common stock have been granted pursuant to the 2007 Plan and are outstanding to various employees, officers, directors, Scientific Advisory Board members and independent distributors at prices between $1.47 and $10.50 per share, with initial vesting periods of one to three years. Awards expire in accordance with the terms of each award and the shares subject to the award are added back to the 2007 Plan upon expiration of the award. The contractual term of stock options granted is generally ten years. ~~As of~~ ~~December 31,~~Effective November 21, 2016,~~, there were~~ no new awards ~~outstanding, net of awards expired, for~~can be granted under the ~~purchase in aggregate of 0.2 million shares of the Company's common stock.~~2007 Plan.

The Company adopted and the shareholders approved the 2010 Long-Term Incentive Plan (the “2010 Plan”), effective September 27, 2010, as amended on August 21, 2014, to provide incentives to ~~eligible~~certain employees, directors and consultants. A maximum of ~~1.5~~1.1 million shares of the Company's common stock can be issued under the 2010 Plan in connection with the grant of awards. Awards to purchase common stock have been granted pursuant to the 2010 Plan and are outstanding to various employees, officers and directors. Outstanding stock options awarded under the 2010 Plan have exercise prices between $~~4.41~~5.60 and $~~24.71~~20.09 per share, and vest over one to four year vesting periods. Awards expire in accordance with the terms of each award and, upon expiration of the award, the shares subject to the award ~~are~~will be added ~~back~~ to the ~~2010~~2017 Plan ~~upon expiration of the award.~~pool as described below. The contractual term of stock

options granted is generally ten years. ~~As of~~ ~~December 31, 2016, there were~~No new awards ~~outstanding, net of awards expired, for an aggregate of 0.1 million~~will be granted under the 2010 Plan and forfeited or terminated shares ofwill be added to the ~~Company’s common stock.~~2017 Plan pool as described below.

The Company adopted a ~~Performance Incentive Plan~~performance incentive plan effective July 1, ~~2014~~2015 (the "Fiscal ~~2015~~2016 Performance Plan"). The Fiscal ~~2015~~2016 Performance Plan is intended to provide selected employees an opportunity to earn performance-based cash bonuses whose value is based upon the Company’s stock value and to encourage such employees to provide services to the

Company and to attract new individuals with outstanding qualifications. The Fiscal ~~2015~~2016 Performance Plan seeks to achieve this purpose by providing for awards in the form of performance share units (the “Units”). No shares will be issued under the Fiscal ~~2015~~2016 Performance Plan. Awards may be settled only with cash and will be paid subsequent to award vesting. The fair value of share-based compensation awards, that include performance shares, are accounted for as liabilities. Vesting for the Units is subject to achievement of both service-based and performance-based vesting requirements. Performance-based vesting occurs in three installments if the Company meets certain performance criteria generally set for each year of a three-year performance period. The service-based vesting criteria occurs in a single installment at the end of the third fiscal year after the awards are granted if the participant has continuously remained in service from the date of award through the end of the third fiscal year. The fair value of these awards is based on the trading price of the Company's common stock and is remeasured at each reporting period date until settlement. The Company adopted separate ~~Performance Incentive Plans~~performance incentive plans effective ~~July 1, 2015 (the "Fiscal 2016 Performance Plan") and~~ July 1, 2016 (the "Fiscal 2017 Performance Plan") and July 1, 2017 (the "Fiscal 2018 Performance Plan"). The Fiscal ~~2016 and~~ 2017 Performance ~~Plans~~Plan and Fiscal 2018 Performance Plan include ~~the same~~ performance-based and service-based vesting requirements and payment ~~terms.~~terms that are substantially the same as described above the Fiscal 2016 Performance Plan.

The Company adopted and the shareholders approved the 2017 Long-Term Incentive Plan (the “2017 Plan”), effective February 16, 2017, to provide incentives to eligible employees, directors and consultants. The maximum number of shares that can be issued under the 2017 Plan is not to exceed 1,125,000 shares, calculated as the sum of (i) 650,000 shares and (ii) up to 475,000 shares previously reserved for issuance under the 2010 Plan, including shares returned upon cancellation, termination or forfeiture of awards that were previously granted under that plan. As of September 30, 2017, a maximum of 1.0 million shares of the Company's common stock can be issued under the 2017 Plan in connection with the grant of awards. Awards expire in accordance with the terms of each award and the shares subject to the award are added back to the 2017 Plan upon expiration of the award.

Stock-Based Compensation

In accordance with accounting guidance for stock-based compensation, payments in equity instruments for goods or services are accounted for ~~under~~by the fair value method. For the three ~~and six~~ months ended ~~December 31, 2016,~~September 30, 2017, stock-based compensation of ~~$0.3~~$0.4 million ~~and $1.0 million, respectively,~~ was reflected as an increase to additional paid-in capital and an increase of ~~$0.1 million and~~ $0.2 million ~~respectively,~~ was included in other accrued expenses, all of which was employee related. For the three ~~and six~~ months ended ~~December 31, 2015,~~September 30, 2016, stock-based compensation of ~~$0.3~~$0.7 million ~~and $0.5 million, respectively,~~ was reflected as an increase to additional paid-in capital and an increase of $0.2 million was included in other accrued expenses, all of which was employee related.

On January 4, 2016, the Company awarded ~~Performance Stock Units~~performance restricted stock units under the 2010 Long-Term Incentive Plan to its executive officers (the "Recipients") and, in March 2016, the Company and each Recipient entered into an amended and restated stock unit agreement (the "Restated Stock Unit Agreement") amending the terms of the January 2016 awards. Under the Restated Stock Unit Agreements, vesting for the ~~Performance Stock Units~~performance restricted stock units occurs at the end of a ~~three year~~three-year performance period beginning January 1, 2016 (the "Performance Period") and is subject to achievement of both service-based and market-based performance vesting requirements. Subject generally to the Recipient's continued service with the Company (the ~~service based~~service-based requirement) and limitations otherwise set forth in the 2010 Long-Term Incentive Plan, each ~~Performance Stock Unit~~performance restricted stock unit represents a contingent right for the Recipient to receive, within thirty days after the end of the performance period, a distribution of shares of common stock of the Company equal to 0% to 200% of the target number of ~~Performance Stock Units~~performance restricted stock units subject to the award. The actual number of shares distributed will be based on the Company's total stockholder return ("TSR") performance during the Performance Period, subject to acceleration upon a change in control of the Company. The vesting for 50% of the ~~Performance Stock Units~~performance restricted stock units is based upon the Company's absolute TSR for the performance period compared to a matrix of fixed numeric values and the vesting for the other 50% of the ~~Performance Stock Units~~performance restricted stock units is based upon the relative comparison of the Company's TSR to the Vanguard Russell 2000 exchange traded fund TSR. The fair value of the ~~Performance Stock Units~~performance restricted stock units will be recognized on a straight-line basis over the requisite service period of the awards, regardless of when, if ever, the market-based performance conditions are satisfied. On March 28, 2017, the Company awarded new performance restricted stock units under the 2017 Long-Term Incentive Plan to its executive officers. These awards have a three-year performance period beginning on January 1, 2017 and otherwise include the same performance-based and service-based vesting requirements as the previous awards.

Note 6 — Commitments and Contingencies

Contingencies

The Company accounts for contingent liabilities in accordance with Accounting Standards Codification ("ASC") Topic 450, Contingencies. This guidance requires management to assess potential contingent liabilities that may exist as of the date of the financial statements to determine the probability and amount of loss that may have occurred, which inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial

statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. For loss contingencies considered remote, no accrual or disclosures are generally made. Management has assessed potential contingent liabilities as of ~~December 31, 2016,~~September 30, 2017, and based on the assessment, there are no probable loss contingencies requiring accrual or disclosures within ~~these~~its financial ~~statements and footnotes.~~

statements.

Legal Accruals

In addition to commitments and obligations in the ordinary course of business, from time to time, the Company is subject to various claims, pending and potential legal actions, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of ~~our~~its business. Management assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in ~~our~~the consolidated financial statements. An estimated loss contingency is accrued in ~~our~~the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because evaluating legal claims and litigation results are inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, management may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed or asserted against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of a potential liability. Management regularly reviews contingencies to determine the adequacy of financial statement accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on the Company's business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on ~~our~~the consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.

~~Former Distributor Lawsuit:~~ On November 20, 2013, the Company filed a complaint in the United States District Court, District of Utah, Central Division naming Jason Domingo and Ovation Marketing Group, Inc. as defendants. Ovation Marketing Group, Inc. is a former distributor of our company. In the complaint, the Company alleges that the defendants breached a contract and misappropriated the Company's trade secrets. On January 21, 2014, the defendants filed an answer and counterclaim in response to the complaint. The defendants' answer and counterclaims allege defamation and tortious interference with economic relations, which the defendants claim resulted in damages of not less than $20 million. On December 14, 2015, the Company filed a motion for summary judgment seeking judgment in its favor on the Company's breach of contract claim and dismissal of all defendants’ counterclaims. Also on December 14, 2015, defendants filed a motion for summary judgment seeking dismissal of the Company's claim for misappropriation of trade secrets and to dismiss the Company's judicial proceedings privilege defense against the defamation claim. The Court heard oral argument on the motions for summary judgment on May 17, 2016. The court granted summary judgment in favor of the Company on all claims except the defamation claim, which remains unresolved. The Company has not established a loss contingency accrual for this remaining counterclaim as to which the Company believes liability is not probable and estimable, and the Company plans to vigorously defend against this lawsuit. On January 20, 2017, the court denied the defendants renewed motion for summary judgment on its contract claim. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.

Class Action Lawsuit: On September 15, 2016, a purported securities class action was filed in the United States District Court for the District of Utah, entitled Zhang v. LifeVantage ~~Corp.~~Corp., Case No. 2:16-cv-00965-BCW (D. Utah filed Sept. 15, 2016). In this action ~~(now~~(later recaptioned as In re LifeVantage Corp. Securities Litigation), plaintiff ~~alleges~~alleged that the Company, its Chief Executive Officer and former Chief Financial Officer violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by making false or misleading statements or omissions in public filings with the Securities and Exchange Commission regarding the Company's internal controls and financial results for the first, second and third quarters of fiscal year 2016. The initial complaint sought unspecified damages against the defendants on behalf of a class of purchasers of the Company’s stock between November 4, 2015 and September 13, 2016. By stipulation filed October 7, 2016, the parties agreed that defendants need not respond to the initial complaint in the action until after a lead plaintiff is appointed pursuant to the Private Securities Litigation Reform Act of 1995, at which time the parties will meet and confer regarding the timing of the filing of an amended complaint and responses thereto. On November 14, 2016, three motions for appointment as lead plaintiff were filed. On December 13, 2016, the Court appointed Dale Blanch and Yvonne Cohen as lead plaintiffs and approved their selection of lead plaintiffs’ counsel. On January 27, 2017, lead plaintiffs filed an amended complaint largely reiterating the claims asserted in the original initial complaint and expanding the putative class period. On June 15, 2017, the Court granted defendants’ motion to dismiss the amended complaint, without prejudice, and permitted lead plaintiffs to file a motion for leave to file a second amended complaint. ~~Defendants must file their response thereto on or before March 13, 2017. The Company has~~On July 6, 2017, lead plaintiffs filed a motion for leave to amend. On September 18, 2017, the Court denied lead plaintiffs’ motion for leave to amend and entered final judgment in favor of defendants and dismissed the case with prejudice. On October 17, 2017, the parties executed a stipulation whereby lead plaintiffs agreed not ~~established a loss contingency accrual~~to take an appeal from the final judgment of dismissal in favor of defendants in exchange for ~~this lawsuit as it believes liability~~mutual releases, without payment of any consideration by defendants. This case is not probable or estimable, and the Company plans to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.now concluded.

Derivative Action ~~Lawsuit:~~Lawsuits: On October 11, 2016, two purported shareholder derivative actions were filed in the Third District Court of the State of Utah, Salt Lake County, entitled Johnson v. Jensen,, Case No. 160906320 MI (Utah Dist. filed Oct. 11, 2016), and Rupp v. Jensen,, Case No. 160906321 MI (Utah Dist. filed Oct. 11, 2016). In these actions (which are substantively identical), plaintiffs, purportedly on behalf of the Company, allege that the Company's Chief Executive Officer, former Chief Financial Officer and members of the ~~Board~~board of ~~Directors~~directors breached their fiduciary duties owed to the Company by, among other things, causing or permitting the Company to issue false and misleading statements or omissions in public filings with the Securities and Exchange Commission, as alleged in the class action lawsuit noted above. On October 19, 2016, the Court entered an order consolidating the two actions under the Johnson case number, with the new caption In re LifeVantage Corp. Derivative Litigation,, providing that defendants and nominal defendant need not respond to the initial complaints and directing the parties to meet and confer within thirty days on a schedule for further proceedings in this action. On November 21, 2016, the Court approved a stipulation between the parties providing that (a) defendants and nominal defendant need not respond to the initial complaints and (b) within thirty days from the earlier of (i) the Company’s filing of its Form 10-K for fiscal year 2016 and (ii) plaintiffs’ filing of a consolidated amended complaint, the parties will meet and confer on a schedule regarding further proceedings in this action. On January 10, 2017, the Court approved a stipulation between the parties

providing that this action would be deferred (~~i.e.~~(i.e., stayed) pending a ruling on defendants’ then-anticipated motion to dismiss the amended complaint in the Class Action Lawsuit. On March 13, 2017, plaintiffs filed a consolidated amended complaint. On July 14, 2017, the parties agree to continue the deferral (stay) of this action pending a ruling denying lead plaintiffs’ motion for leave to amend or on defendants’ anticipated motion to dismiss the amended complaint in the Class Action Lawsuit.

On January 30, 2017, another purported shareholder derivative action was filed in the United States District Court for the District of Utah, entitled Hansen v. Jensen, Case No. 2:17-cv-00075-DN (D. Utah filed Jan. 30, 2017). In this action, plaintiff, purportedly on behalf of the Company, alleges that the Company’s Chief Executive Officer, former Chief Financial Officer and members of the board of directors violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and breached their fiduciary duties owed to the Company by, among other things, causing or permitting the Company to issue false and misleading statements or omissions in public filings with the SEC, as alleged in the class action lawsuit noted above. On March 30, 2017, the parties entered into a stipulation providing that this action would be stayed pending a ruling on defendants’ motion to dismiss the amended complaint in the Class Action Lawsuit. On February 27, 2017, another purported shareholder derivative action was filed in the United States District Court for the District of Utah, entitled Baker v. Jensen, Case No. 2:17-cv-00141-PMW (D. Utah filed Feb. 27, 2017). Also, on April 24, 2017, another purported shareholder derivative action was filed in the United States District Court for the District of Utah, entitled Inforzato v. Jensen, Case No. 2:17-cv-00317-JNP (D. Utah filed Apr. 24, 2017). In these actions, plaintiffs, also purportedly on behalf of the Company, make similar allegations as the plaintiff in Hansen v. Jensen, described above. The parties in Baker and Inforzato similarly have agreed to stays of those actions pending a ruling on defendants’ motion to dismiss in the Class Action Lawsuit. All Derivative Action Lawsuits remain stayed.

The Company notes that although the plaintiffs in ~~this action are seeking~~the Derivative Action Lawsuits purport to seek unspecified damages against the individual defendants on behalf of the Company, the Company owes certain indemnification obligations to these individual defendants under ~~Delaware~~Colorado law and existing indemnification agreements. The Company has not established a loss contingency accrual for this lawsuit as it believes liability is not probable or estimable, and the defendants plan to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations or financial condition.

Other Matters. In addition to the matters described above, the Company also may become involved in other litigation and regulatory matters incidental to its business and the matters disclosed in this ~~Quarterly Report~~quarterly report on Form 10-Q, including, but not limited to, product liability claims, regulatory actions, employment matters and commercial disputes. The Company intends to defend itself in any such matters and does not currently believe that the outcome of any such matters will have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

Note 7 — Related Party Transactions

During the current fiscal year, there are three transactions or series of similar transactions to which the Company was or is to be a party in which the amount involved will exceed $120,000 and in which any director, executive officer, holder of more than 5% of the Company's common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

During the six months ended December 31, 2016, Dinng, a brand and digital brand studio, provided branding and marketing services to the Company pursuant to an Agreement for Services dated August 18, 2015 between the Company and Dinng, in the amount of $0.2 million. The Company's Chief Marketing Officer, Ryan Goodwin, is the founder of Dinng and currently serves as Dinng’s President and Creative Director. Mr. Goodwin and his wife are both salaried employees at Dinng.

During the six months ended December 31, 2016, Outhink Inc., a digital media and application development company, provided consulting services to the Company pursuant to an Agreement for Services dated October 20, 2016 between the Company and Outhink Inc. in the amount of $0.1 million. David Toole, a member of the Company's board of directors, is a majority owner and serves as the Chief Executive Officer of Outhink Inc.

Effective January 2014, the Company commenced a partnership with Real Salt Lake of Major League Soccer, which includes the placement of the Company's logo on the front of the team’s jersey as well as strategic placement of the Company's logo around the stadium and on televised broadcasts of the games. In July 2015, Dell Loy Hansen, the sole owner of Real Salt Lake and Real Monarchs SLC, became a 5%major stockholder of the Company. During ~~fiscal year~~the three months ended September 30, 2017, the Company ~~will pay $2.7~~paid $1.0 million to Real Salt Lake pursuant to the terms of this partnership, and other various amounts for the endorsement of Real Monarchs SLC and product marketing expenses. During fiscal year 2018, the Company will additionally pay approximately $3.0 million to Real Salt Lake pursuant to the terms of this partnership. During the three months ended September 30, 2016, no amounts were paid by the Company.

During the three months ended September 30, 2017, Gig Economy Group ("GEG") provided outsourced software application development services to the Company pursuant to an agreement entered into between the Company and GEG in the amount of $0.9 million. During the three months ended September 30, 2016, GEG did not provide services to the Company. David Toole, a member of the Company's board of directors, is a majority owner and an officer of GEG.

~~Note 8 — Subsequent Events~~

On January 18, 2017, the Company terminated the employment of Mark Jaggi, the Company's Chief Financial Officer. Also effective January 18, 2017, the Company appointed Gary Koos, through Cerius Interim Executive Solutions, to serve as the Company's interim Chief Financial Officer and its principal financial officer.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a company focused on bio-hacking the aging code through nutrigenomics, the study of how nutrition and naturally occurring compounds affect human genes. We are dedicated to helping people achieve their health, wellness and financial independence goals. We provide quality, ~~scientifically validated~~scientifically-validated products and a financially rewarding direct sales business opportunity to preferred customers, retail customers and independent distributors who seek a healthy lifestyle and financial freedom. We engage in the identification, research, development and distribution of advanced nutraceutical dietary supplements and skin care products. We currently sell our products to preferred customers, retail customers and independent distributors in two geographic regions that we have classified as the Americas region and the Asia/Pacific & Europe region.

Our revenue depends on the number and productivity of our independent distributors and the number of our retail and preferred customers. When we are successful in attracting and retaining independent distributors and preferred customers, it is largely because of:


•	Our scientifically-validated products, including our Protandim® product line, TrueScience® anti-aging skin care line, Petandim™ for Dogs, Axio® Smart Energy Drink mixes and PhysIQ™ Smart Weight Management System; ~~Our scientifically-validated products, including our Protandim~~^® ~~product line, LifeVantage TrueScience~~^®~~, Canine Health~~^®~~, Axio~~^® ~~and PhysIQ™;~~

•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 have begun selling our products and attracting new independent distributors ~~retail customers~~ and preferred customers in several new markets since the beginning of our direct selling activities in 2009, including Japan, Hong Kong, Australia, Canada, Mexico, ~~Hong Kong,~~ Thailand, the United Kingdom, the Netherlands and onGermany. In addition, we expect to expand into China in the near term through a ~~limited basis, the Philippines.~~new e-commerce business model. Entering a new ~~markets~~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 ~~will~~may be negatively impacted.

Our Products

Our products are the Protandim^®product line, the ~~LifeVantage~~ TrueScience^®anti-aging skin care ~~regimen,~~line, Axio^®~~, the~~Smart Energy Drink mixes, PhysIQ^™ ~~smart weight management system~~Smart Weight Management System and ~~Canine Health~~^®.Petandim™ for Dogs. The Protandim^® product line includes Protandim^® NRF1 and Nrf2 ~~synergizers.~~Synergizers™. The Protandim^®NRF1 ~~synergizer~~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~~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. Our ~~LifeVantage~~ TrueScience^® anti-aging skin care ~~regimen~~line includes TrueScience^® ~~Ultra Gentle~~ Facial Cleanser, TrueScience^® Perfecting Lotion, TrueScience^® Eye ~~Corrector~~ Serum, TrueScience^®~~Micro-Lift Serum~~Anti-Aging Cream and ~~our enhanced~~ TrueScience^® ~~Anti-Aging Cream,~~Micro-Lift Serum. Axio^® is our line of ~~energy drink~~Smart Energy Drink mixes formulated to promote alertness and support mental performance. ~~Canine Health~~^® ~~is a supplement specially formulated to combat oxidative stress in dogs through Nrf2 activation.~~ PhysIQ^™ is our ~~smart weight management system~~Smart Weight Management System which includes PhysIQ^™ Fat Burn, PhysIQ^™ ProBio, PhysIQ^™Cleanse and ~~the~~ PhysIQ^™ Protein Shake mix, all formulated to aid in weight management. Petandim™ for Dogs is a supplement specially formulated to combat oxidative stress in dogs through Nrf2 activation.

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

Customers

Because we utilize a direct selling model for the distribution of our products, the success and growth of our business is primarily based on the effectiveness of our independent distributors in selling our products and on 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 preferred customers purchasing our products. The number of active independent distributors and preferred customers is, therefore, used by management as a key non-financial measure.

The following tables summarize the changes in our active customer base by geographic region. These numbers have been rounded to the nearest thousand as of the dates indicated. For purposes of this report, we only count as active customers those independent distributors and preferred customers who have purchased from us at any time during the most recent three-month period, either for personal use or for resale.


	Active Preferred Customers By Region										Active Preferred Customers By Region
	December 31,										As of September 30,
	2016			2015			Change from Prior Year		Percent Change		2017			2016			Change from Prior Year		Percent Change
Americas	89,000	80.2	%	96,000	82.1	%	(7,000	)	(7.3	)%	87,000	79.8	%	91,000	79.8	%	(4,000	)	(4.4	)%
Asia/Pacific & Europe	22,000	19.8	%	21,000	17.9	%	1,000		4.8	%	22,000	20.2	%	23,000	20.2	%	(1,000	)	(4.3	)%
	111,000	100.0	%	117,000	100.0	%	(6,000	)	(5.1	)%	109,000	100.0	%	114,000	100.0	%	(5,000	)	(4.4	)%


	Active Independent Distributors By Region										Active Independent Distributors By Region
	December 31,										As of September 30,
	2016			2015			Change from Prior Year		Percent Change		2017			2016			Change from Prior Year		Percent Change
Americas	46,000	73.0	%	46,000	68.7	%	—		—	%	45,000	71.4	%	48,000	70.6	%	(3,000	)	(6.3	)%
Asia/Pacific & Europe	17,000	27.0	%	21,000	31.3	%	(4,000	)	(19.0	)%	18,000	28.6	%	20,000	29.4	%	(2,000	)	(10.0	)%
	63,000	100.0	%	67,000	100.0	%	(4,000	)	(6.0	)%	63,000	100.0	%	68,000	100.0	%	(5,000	)	(7.4	)%

Results of Operations

Three ~~and Six months~~Months Ended~~December 31, 2016~~ September 30, 2017 compared to the Three ~~and Six months~~Months Ended ~~December 31, 2015~~September 30, 2016

Revenue. We generated net revenue of ~~$48.9~~$49.1 million and ~~$52.0~~$54.9 million during the three months ended ~~December 31,~~September 30, 2017 and 2016, ~~and 2015, respectively. We generated net revenue of $103.8 million and $97.3 million during the six months ended December 31, 2016 and 2015,~~ respectively. Foreign currency fluctuations ~~positively~~negatively impacted our revenue ~~$1.3~~$0.7 million or ~~2.5%~~1.4% during the three months ended ~~December 31, 2016 and positively impacted our revenue $3.4 million or 3.5% during the six months ended December 31, 2016.~~September 30, 2017. During the three months ended ~~December 31, 2016,~~September 30, 2017, revenues in our United States and Hong Kong markets decreased as compared to the prior year period as we ~~began taking~~took steps, following the completion of the independent review conducted by the audit committee of ~~the~~our board of directors, to help ensure that our products are not distributed or sold into countries without complying with applicable customs, tax and other regulatory requirements and to appropriately verify the residency of individuals who want to become our independent distributors. Consistent with these regulatory requirements, in the future our independent distributors may be able to purchase a limited quantity of such products for personal consumption in one or more of these countries. Nevertheless, we expect that our revenue in future periods from sales of our products that are carried or shipped into these countries will be significantly lower than fiscal 2016.

Americas. The following table sets forth revenue for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 and ~~2015~~2016 for the Americas region (in thousands):


	For the Three Months Ended December 31,						For the Six Months Ended December 31,						Three Months Ended September 30,
	2016		2015		% Change		2016		2015		% Change		2017		2016		% Change
United States	$	35,535	$	38,761	(8.3	)%	$	74,153	$	72,257	2.6	%	$	34,115	$	38,618	(11.7	)%
Other	2,078		1,294		60.6	%	3,595		2,524		42.4	%	2,048		1,517		35.0	%
Americas Total	$	37,613	$	40,055	(6.1	)%	$	77,748	$	74,781	4.0	%	$	36,163	$	40,135	(9.9	)%

Revenue in the Americas region for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 decreased ~~$2.4~~$4.0 million or ~~6.1% and increased $3.0 million or 4.0%, respectively,~~9.9% from the prior year same ~~periods.~~period. The ~~decrease~~policies that we implemented in connection with the audit committee review as discussed above were the primary factor for the decline in revenue for the three months ended ~~December 31, 2016 is due to a~~September 30, 2017, along with an overall decrease in the number of active preferred customers ~~during the period~~ and lower revenues associated with our October 2016 elite academy that was held during the current period as compared to the October 2015 global convention that was held during the prior year same period. The increase in revenue for the six months ended December 31, 2016 is due to higher volume of product sales in the United States and Mexico during the first fiscal quarter including new product revenue from the PhysIQ^™ ~~smart weight management system, driven by increased~~ active ~~distributors and preferred customers during that quarter. These increases were partially offset by the decreased revenues during the three months ended December 31, 2016 as discussed above.~~independent distributors.

Asia/Pacific & Europe. The following table sets forth revenue for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 and ~~2015~~2016 for the Asia/Pacific & Europe region and its principal markets (in thousands):


	For the Three Months Ended December 31,						For the Six Months Ended December 31,						Three Months Ended September 30,
	2016		2015		% Change		2016		2015		% Change		2017		2016		% Change
Japan	$	9,498	$	9,220	3.0	%	$	20,105	$	17,813	12.9	%	$	10,856	$	10,607	2.3	%
Hong Kong	721		2,000		(64.0	)%	3,344		3,179		5.2	%	247		2,623		(90.6	)%
Other	1,115		720		54.9	%	2,644		1,574		68.0	%	1,861		1,529		21.7	%
Asia/Pacific & Europe Total	$	11,334	$	11,940	(5.1	)%	$	26,093	$	22,566	15.6	%	$	12,964	$	14,759	(12.2	)%

Revenue in the Asia/Pacific & Europe region was ~~positively~~negatively impacted approximately ~~$1.3~~$0.8 million or ~~9.4% and $3.4 million or 13.2%~~5.6% during the three ~~and six~~ months ended ~~December 31, 2016, respectively,~~September 30, 2017, as compared to the prior year period, by foreign currency exchange rate fluctuations.

~~During~~ The negative impact for the ~~three and six months ended December 31, 2016~~region was primarily due to the weakening of the Japanese yen ~~continued to strengthen~~ against the U.S. dollar, positively impacting our revenue in this market by $0.9 million or 10.3% and $2.7 million or 15.0%, respectively. Excluding the impact of foreign currency fluctuations, local currency revenues in Japan decreased during the three and six months ended December 31, 2016 due to lower product sales volume and an overall decrease in the number of active distributors in Japanas compared to the prior year ~~periods.~~period, negatively impacting our revenue in Japan by $0.9 million or 8.5%. On a constant currency basis, revenue in Japan increased 10.9% primarily due to a successful elite academy event held in Japan in September 2017. The policies that we implemented in connection with the audit committee review as disclosed previously contributed to the decline in revenue in Hong Kong.

~~All of our sales and marketing efforts~~We continue to be directed toward building our worldwide sales. We expect increased revenue in the Americas region as we focus on our growth initiatives, specifically the development and expansion of new distributor tools, training and technology and the continued scientific research and introduction of new products. During the prior fiscal year we held cyber launches for both our PhysIQ^™~~smart weight management system and the Protandim~~^®NRF1 synergizer, both of which expanded our product offerings which have contributed to our increased year-to-date sales. We expect revenue in the Asia/Pacific and Europe region to increase moderately as we focus on strengthening our ~~sales and marketing efforts,~~core business, including the ~~global~~ expansion of our product ~~lines, the creation of country-specific marketing tools and materials~~offering and expanding our ~~geographic reach while seeking~~global footprint. These efforts include the development and enhancement of distributor tools, training aids and technology, the scientific research and development of new products, and entrance into new markets. During the three months ended September 30, 2017, we launched business operations in Germany and held events for our independent distributors in the US, Canada and Japan. We are investing in both internal and external technology tools that we expect will help our independent distributors grow their business and help us better operate our business. We remain committed to ~~ensure that~~pursuing growth in each of our ~~products are not distributed or sold into countries without complying~~markets and operating our business in accordance with ~~applicable customs, duties and other regulatory requirements.~~our strengthened business practices.

Gross Margin. Our gross profit percentage for the three months ended ~~December 31,~~September 30, 2017 and 2016 was 82.2% and ~~2015 was 84.7% and 84.9%, respectively. Our gross profit percentage for the six months ended December 31, 2016 and 2015 was 84.3% and 84.8%~~83.9%, respectively.

As a percentage of total revenues, cost of sales for the three months ended ~~December 31, 2016~~September 30, 2017 increased to ~~15.3%~~17.8% compared to ~~15.1%~~16.1% for the three months ended ~~December 31, 2015 and increased for the six months ended December 31, 2016 to 15.7% from 15.2% for the six months ended December 31, 2015.~~September 30, 2016. The increase in cost of sales as a percentage of revenue for the three ~~and six~~ months ended ~~December 31, 2016,~~September 30, 2017, as compared to the prior year same ~~periods,~~period, is due primarily to changes in product sales mix, due in part to the launch of several new products during the preceding year, resulting in higher costs of goods sold as a percentage of revenue. Gross margin also decreased as a percentage of revenue due to increased costs associated with ~~the shipment, storage, handling, quality testing~~product and ~~obsolescence of inventory.~~geographic sales mix.

Operating Expenses. Total operating expenses during the three months ended ~~December 31, 2016 increased~~September 30, 2017 decreased to ~~$40.7~~$39.0 million or ~~83.2%~~79.4% of revenues as compared to operating expenses of ~~$41.1~~$44.1 million or ~~79.1%~~80.3% of revenues during the three months ended December 31, 2015. Total operating expenses during the six months ended December 31, 2016 increased to $84.8 million or 81.7% of revenues as compared to operating expenses of $76.8 million or 78.9% of revenues during the six months ended December 31, 2015.September 30, 2016. Operating expenses consist of commission and incentives expenses and selling, general and administrative expenses.

Commissions and Incentives. Commissions and incentives expenses during the three months ended ~~December 31, 2016~~September 30, 2017 were ~~$23.5~~$23.4 million or ~~48.1%~~47.6% of revenues as compared to commissions and incentives expenses of ~~$27.3~~$26.3 million or ~~52.5%~~47.9% of revenues for the three months ended December 31, 2015. Commissions and incentives expenses during the six months ended December 31, 2016 were $49.8 million or 48.0% of revenues as compared to commissions and incentives expenses of $49.3 million or 50.7% of revenues for the six months ended December 31, 2015.September 30, 2016.

The overall decrease in commissions and incentives expenses for the three months ended ~~December 31, 2016 was driven mainly by an overall decrease in sales compared to the prior year period. Commissions and incentives expenses~~September 30, 2017 as a percentage of revenues decreased for the same period, which is the result of refinements made to the Company's programs designed to attract new leaders, drive sales growth, and enhance international market expansion.

The increase in commissions and incentives expenses for the six months ended December 31, 2016 was driven mainly by an overall increase in sales compared to the prior year period. Commissions and incentives expenses as a percentage of revenues decreased for the six months ended December 31, 2016 compared to the prior year period ~~which~~ is ~~the result of refinements made~~due to the ~~Company's programs designed~~overall decrease in revenue and refinements to ~~attract new leaders, drive sales growth,~~our commission and ~~enhance international market expansion.~~incentive programs.

We expect ~~our~~ commissions and incentives expenses to remain ~~consistent~~relatively stable as a percentage of net sales during the remainder of fiscal ~~2017 as we continue~~2018, with some fluctuations caused by changes to ~~focus our efforts on increasing revenue through growth~~compensation and ~~retention of our distributors~~incentive programs and ~~preferred customers, both domestically and internationally.~~initiatives.

Selling, General and Administrative. Selling, general and administrative expenses during the three months ended ~~December 31, 2016~~September 30, 2017 were ~~$17.2~~$15.6 million as compared to selling, general and administrative expenses of ~~$13.8~~$17.8 million for the three months ended December 31, 2015. Selling, general and administrative expenses during the six months ended December 31, 2016 were $35.0 million as compared to selling, general and administrative expenses of $27.5 million for the six months ended December 31, 2015.September 30, 2016.

The ~~increase~~decrease in selling, general and administrative expenses during the three months ended ~~December 31, 2016~~September 30, 2017 compared to the prior year same period was primarily due to ~~increased~~decreased legal and accounting expenses associated with the independent review conducted by the ~~Audit Committee that~~audit committee of our board of directors, which was completed ~~during the quarter.~~December 2016. Additionally, expenses associated with stock compensation, employee salaries and benefits ~~increased~~and recruiting decreased due to ~~increased head count compared~~changes to ~~the prior year period. These increases were partially offset by~~our management team as well as decreases in ~~event expenses related to the October 2016 elite academy held~~bank fees realized during the current period as ~~compared to the October 2015 global convention that was held during the prior year period.~~

The increase in selling, general and administrative expenses during the six months ended December 31, 2016 compared to the prior year same period was due primarily to increased legal and accounting expenses associated with the independent review conducted by the Audit Committee that was completed during the quarter. Expenses associated with employee salaries, benefits, and stock compensation increased as a result of ~~increased head count compared to~~ the ~~prior year period and total event expenses increased as compared to the prior year period due to increased attendance at the current year events.~~decrease in revenues.

We expect ~~our~~ selling, general and administrative expenses, as a ~~percentage~~percent of revenue, to ~~decrease slightly during the remainder of fiscal year 2017 as the Audit Committee has completed its independent review and~~remain relatively consistent as we ~~continue to refine~~execute on our strategic ~~initiatives and coordinate our spending with sales trends and geographic expansion.~~initiatives.

Total Other ~~Income (Expense).~~Expense. During the three ~~and six~~ months ended ~~December 31, 2016,~~September 30, 2017, we recognized net other expenses of ~~$0.3~~$0.1 million, ~~and $0.6 million, respectively,~~ as compared to net other expenses of ~~$0.6 million and $1.6~~$0.3 million for the three ~~and six~~ months ended ~~December 31, 2015, respectively.~~

September 30, 2016. Total other ~~income (expense)~~expense for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 consisted primarily of interest expense and net currency ~~losses.~~gains.

The following table sets forth interest expense for the three ~~and six~~ months ended ~~December 31,~~September 30, 2017 and 2016 ~~and 2015~~ (in thousands):


	For the Three Months Ended December 31,				For the Six Months Ended December 31,				Three Months Ended September 30,
	2016		2015		2016		2015		2017		2016
Contractual interest expense:
2013 Term Loan	$	—	$	395	$	—	$	954
2016 Term Loan	113		—		233		—		$	95	$	120
Amortization of deferred financing fees:
2013 Term Loan	—		125		—		229
2016 Term Loan	3		—		6		—		3		3
Amortization of debt discount:
2013 Term Loan	—		97		—		178
2016 Term Loan	5		—		10		—		5		5
Other	17		2		26		7		59		9
Total interest expense	$	138	$	619	$	275	$	1,368	$	162	$	137

Income Tax Expense. We recognized income tax expense of ~~$0.1 million and $0.6~~$0.4 million for the three ~~and six~~ months ended ~~December 31, 2016, respectively,~~September 30, 2017, as compared to income tax expense of ~~$0.8 million and $1.5~~$0.5 million for the three ~~and six~~ months ended ~~December 31, 2015, respectively.~~September 30, 2016.

The effective tax rate was ~~31.3% and 30.0%, respectively,~~35.1% of pre-tax income during the three ~~and six~~ months ended ~~December 31, 2016,~~September 30, 2017, compared to ~~33.9% and 35.4%~~29.7% for the same prior year ~~periods.~~period. The ~~decrease~~increase in the effective tax rate for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 compared to the prior year ~~periods~~period is due to changes in current income projections and the impact of certain discrete and permanent items and ~~discrete items,~~ return to provision ~~adjustments and benefits related to foreign tax rate differences due to our permanent reinvestment assertion.~~adjustments.

Liquidity and Capital Resources

Liquidity

Our primary liquidity and capital resource requirements are to service our debt 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.

As of ~~December 31, 2016~~September 30, 2017, our available liquidity was ~~$11.7~~$12.3 million, ~~including~~which consisted of available cash and cash equivalents. This represents an increase of ~~$3.8~~$0.8 million from the $~~7.9~~11.5 million in cash and cash equivalents as of June 30, ~~2016~~2017.

During the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017, our net cash provided by operating activities was $~~5.1~~2.5 million as compared to net cash provided by operating activities of $~~8.5~~2.9 million during the ~~six~~three months ended ~~December 31, 2015~~September 30, 2016.

During the ~~six~~three months ended ~~December 31,~~September 30, 2017, our net cash used in investing activities was $1.2 million, as a result of our investment in new technology assets and the purchase of fixed assets. During the three months endedSeptember 30, 2016, our net cash used in investing activities was $~~0.2 million, as a result of the purchase of fixed assets. During the~~ ~~six months endedDecember 31, 2015, our net cash used in investing activities was~~ ~~$0.3~~0.1 million, as a result of the purchase of fixed assets.

Cash used in financing activities during the ~~six~~three months ended ~~December 31,~~September 30, 2017 and 2016 was ~~$1.0~~$0.5 million ~~which was comprised~~and $0.5 million, respectively, as a result of ~~$1.0 million in~~our quarterly principal payments on the March 2016 Term Loan. Cash used in financing activities during the six months ended December 31, 2015 was $6.3 million, which was comprised primarily of $6.8 million in principal payments on the October 2013 Term Loan, partially offset by benefits related to the vesting of equity awards during the prior year period.

At ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016~~2017, the total amount of our foreign subsidiary cash was $~~5.9~~7.1 million and $~~5.1~~6.6 million, respectively. For earnings considered to be indefinitely reinvested, we have not accrued taxes. If we were to remit the cash and cash equivalents from our foreign subsidiaries to our U.S. consolidated group for the purpose of repatriation of undistributed earnings, we would need to accrue and pay taxes. As of ~~December 31, 2016,~~September 30, 2017, our U.S. consolidated group had approximately ~~$1.2~~$2.7 million of permanently reinvested unremitted earnings from our ~~subsidiaries, and if these earnings were remitted, the impact of any tax consequences on our overall liquidity position would not be material.~~subsidiaries. We do not have any plans to repatriate these unremitted earnings to our parent; therefore, we do not have any liquidity concerns relating to these unremitted earnings and related cash and cash equivalents.

At ~~December 31, 2016~~September 30, 2017, we had working capital (current assets minus current liabilities) of $~~13.2~~11.9 million, compared to working capital of $~~13.9~~12.2 million at June 30, ~~2016~~2017. 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, we would consider realigning our strategic plans including a reduction in capital spending and expenses.

Capital Resources

On October 18, 2013, we entered into a Financing Agreement providing for a term loan facility in an aggregate principal amount of $47 million (the “October 2013 Term Loan”) and a delayed draw term loan facility in an aggregate principal amount not to exceed $20 million (the “October 2013 Delayed Draw Term Loan”). The October 2013 Delayed Draw Term Loan was available for borrowing in specified minimum amounts from time to time beginning after the effective date of the Financing Agreement until October 18, 2014 or until the October 2013 Delayed Draw Term Loan was reduced to zero, if earlier. We did not borrow any amounts under the October 2013 Delayed Draw Term Loan.

On May 1, 2015, we entered into an Amendment No. 1 to Financing Agreement ("Amendment No. 1"). Amendment No. 1 revised the covenants relating to minimum consolidated EBITDA (as defined in the Financing Agreement) for the four consecutive fiscal quarters ending March 31, 2015 and June 30, 2015 from $20.6 million and $21.3 million, respectively, to $17.0 million for each quarter end. Amendment No. 1 also revised the minimum unrestricted cash and cash equivalents that we were required to hold from $10.0 million to $8.0 million for the reporting periods ended March 31, 2015 and June 30, 2015. In addition, Amendment No. 1 required that we make certain accelerated principal payments on the October 2013 Term Loan totaling $4.5 million during our fourth quarter of fiscal year 2016.

On August 27, 2015, we entered into an Amendment No. 2 to Financing Agreement ("Amendment No. 2" and collectively with the October 2013 Term Loan, as previously amended by Amendment No. 1, the "October 2013 Credit Facility"). Amendment No. 2 revised the covenants related to minimum consolidated EBITDA (as defined in the amended Financing Agreement) for the four consecutive fiscal quarters ending September 30, 2015, December 31, 2015, March 31, 2016 and June 30, 2016 from $22.2 million, $23.1 million, $24.4 million and $25.6 million, respectively, to $14.5 million, $15.0 million, $17.0 million and $17.5 million, respectively. In addition, Amendment No. 2 required that we make additional monthly accelerated principal payments on the October 2013 Term Loan in the amount of $0.5 million commencing on October 15, 2015 and continuing until the October 2013 Term Loan was paid in full. Amendment No. 2 also required that we make additional accelerated payments at the end of each fiscal quarter in the amount of all unrestricted cash on hand as of the close of business on the last day of the quarter in excess of $12.5 million. On March 30, 2016, we repaid the full amount outstanding under the October 2013 Term Loan and terminated the October 2013 Credit Facility.

On March 30, 2016, we entered into a Loan Agreement (the “March 2016 Loan Agreement”) to refinance our outstanding ~~debt under the October 2013 Term Loan.~~debt. In connection with the March 2016 Loan Agreement and on the same date, we entered into a ~~Security Agreement~~security agreement (the ~~“March 2016 Security~~“Security Agreement”). The March 2016 Loan Agreement provides for a term loan in an aggregate principal amount of $10.0 million (the “March 2016 Term Loan") and a revolving loan facility in an aggregate principal amount not to exceed $2.0 million (the “March 2016 Revolving Loan,” and collectively with the March 2016 Term Loan, the March 2016 Loan Agreement and the ~~March 2016~~ Security Agreement, the “March 2016 Credit Facility”).

The principal amount of the March 2016 Term Loan is payable in consecutive quarterly installments in the amount of $0.5 million plus accrued interest beginning with the fiscal quarter ended June 30, 2016 and maturing on March 30, 2019 (the “Maturity Date”). The March 2016 Term Loan bears interest at a fixed rate of 4.93%. If we borrow under the March 2016 Revolving Loan, interest will be payable quarterly in arrears on the last day of each fiscal quarter at a variable rate equal to the 30 day LIBOR Rate plus 3.50%.

The March 2016 Credit Facility contains customary covenants, including affirmative and negative covenants that, among other things, restrict our ability to create certain types of liens, incur additional indebtedness, declare or pay dividends on or redeem capital stock, make other payments to holders of our equity interests, make certain investments, purchase or otherwise acquire all or substantially all the assets or equity interests of other companies, sell assets or enter into consolidations, mergers or transfers of all or any substantial part of our assets. As of ~~December 31, 2016,~~September 30, 2017, we were in compliance with all applicable non-financial and restrictive covenants under the March 2016 Credit Facility; provided, however, that on October 24, 2016, we were granted a waiver and extension to covenants requiring us to provide the lender with audited financial statements for our 2016 fiscal year on or before October 28, 2016. Under the limited waiver and extension, the lender agreed to waive compliance with this requirement if we delivered such audited financial statements prior to December 31, 2016. In connection with the filing of our Form 10-K on December 12, 2016, we delivered all required information to the lender to satisfy the requirement. Additionally, management anticipates that in the normal course of operations, we will be in compliance with the non-financial and restrictive covenants during the ensuing year.Facility.

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

Maintain a minimum fixed charge coverage ratio (as defined in the March 2016 Loan Agreement) of at least 1.50 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 March 2016 Loan Agreement) at the end of each fiscal quarter of at least $5.0 million;

Maintain a ratio of funded debt to EBITDA (as defined in the March 2016 Loan Agreement) of not greater than 2.00 to 1.00 at the end of each quarter, measured on a trailing twelve month basis; and

Have a tangible net worth (as defined in the March 2016 Loan Agreement) of at least $4.0 million by the end of our 2016 fiscal year and maintain that minimum tangible net worth thereafter, measured annually at fiscal year-end.

As of ~~December 31, 2016,~~September 30, 2017, we were in compliance with all applicable financial covenants under the March 2016 Credit Facility. Additionally, management anticipates that in the normal course of operations we will be in compliance with the financial covenants during the ensuing year.

Commitments and Obligations

The following table summarizes our contractual payment obligations and commitments as of September 30, 2017 (in thousands):



			Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
Long-term debt obligations	$	7,000	$	2,000	$	5,000	$	—	$	—
Interest on long-term debt obligations	431		312		119		—		—
Operating lease obligations	12,290		2,557		6,303		3,430		—
Other operating obligations ⁽¹⁾	9,106		9,106		—		—		—
Total	$	28,827	$	13,975	$	11,422	$	3,430	$	—

(1) Other operating obligations represent non-cancelable contractual obligations primarily related to marketing and sponsorship commitments, as well as purchases of inventory.

Off-Balance Sheet Arrangements

As of ~~December 31, 2016~~September 30, 2017, we did not have any off-balance sheet arrangements.

Critical Accounting Policies

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of 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 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, customers may return unopened product to us within 30 days of purchase for a refund of the purchase price less shipping and handling. As of ~~December 31, 2016~~September 30, 2017, our ~~shipment~~shipments of products sold totaling approximately $15.6 million were subject to the return policy. In addition, we allow terminating distributors to return up to 30% of unopened, unexpired product they purchased within the prior 12twelve months.

We monitor our ~~return~~product returns estimate on an ongoing basis and ~~may~~ revise the allowances to reflect our experience. Our allowance for product returns was ~~$0.4~~$0.3 million at ~~December 31, 2016,~~September 30, 2017, compared with ~~$0.3~~$0.4 million at June 30, ~~2016.~~2017. To date, product expiration dates have not played any role in product returns, and we do not expect that they will in the future as it is unlikely that we will ship product with an expiration date earlier than the latest allowable product return date.

Inventory Valuation

We value our inventory at the lower of cost or net realizable value on a first-in first-out basis. Accordingly, we reduce our inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market 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. ~~We have recorded~~

~~$0.1 million~~ ~~of obsolescence costs for~~During the three months ended September 30, 2017 and 2016, we recognized expenses of ~~December 31, 2016~~$0.3 million. and $0.6 million, respectively, related to obsolete and slow-moving inventory.

Revenue Recognition

We ship the majority of our product directly to the consumer and receive substantially all payment for these sales in the form of credit card receipts. Revenue from direct product sales to customers is recognized upon shipment, which is when passage of title and risk of loss occurs.

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 payments related to research and development activities as incurred.

Legal Accruals

We are occasionally involved in lawsuits and disputes arising in the normal course of business. Management regularly reviews all pending litigation matters in which we are involved and establishes accruals as we deem appropriate for these litigation matters when a probable loss estimate can be made. Estimated accruals require management judgment about future events. The results of lawsuits are inherently unpredictable and unfavorable resolutions could occur. As such, the amount of loss may differ from management estimates.

~~Commitments and Obligations~~

~~The following table summarizes our contractual payment obligations and commitments as of~~ ~~December 31, 2016~~ ~~(in thousands):~~

Payments due by period
Contractual Obligations Total
Less than
1 year
1-3 years 3-5 years Thereafter
Long-term debt obligations $ 8,500
$ 2,000
$ 6,500
$ —
$ —
Interest on long-term debt obligations 730
387
343
—
—
Operating lease obligations 10,210
1,955
3,810
4,203
242
Total $ 19,440
$ 4,342
$ 10,653
$ 4,203
$ 242

Recently Issued Accounting Standards

See Note 2 to our unaudited condensed consolidated financial statements for a discussion of recently issued accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We conduct business in several countries and intend to continue to grow our international operations. Net revenue, operating income and net income are affected by fluctuations in currency exchange rates and other uncertainties in doing business and selling products in more than one currency. In addition, our operations are exposed to risks associated with changes in social, political and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where we have operations, as well as, to a lesser extent, changes in U.S. laws and regulations relating to international trade and investment.

Foreign Currency Risk

During the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017, approximately ~~28.6%~~30.6% of our net revenue was realized outside of the United States. The local currency of each international subsidiary is generally the functional currency. All revenues and expenses are translated at weighted-average exchange rates for the periods reported. Therefore, our reported revenue and earnings will be positively impacted by a weakening of the U.S. dollar and will be negatively impacted by a strengthening of the U.S. dollar. Currency fluctuations, however, have the opposite effect on our expenses incurred outside the United States. Given the large portion of our business derived from Japan, any weakening of the Japanese yen will negatively impact our reported revenue and profits, whereas a strengthening of the Japanese yen will positively impact our reported revenue and profits. Because of the uncertainty of exchange rate fluctuations, it is difficult to predict the effect of these fluctuations on our future business, product pricing and results of operations or financial condition. Changes in various currency exchange rates affect the relative prices at which we sell our products. We regularly monitor our foreign currency risks and periodically take measures to reduce the risk of foreign exchange rate fluctuations on our operating results. Additionally, we may seek to reduce our exposure to fluctuations in foreign currency exchange rates through the use of foreign currency exchange contracts. We do not use derivative financial instruments for trading or speculative purposes. At ~~December 31, 2016~~September 30, 2017, we did not have any derivative instruments. A 10% strengthening of the U.S. dollar compared to all of the foreign currencies in which we transact business would have resulted in a ~~2.6%~~2.8% decrease of our ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 revenue, in the amount of ~~$2.7~~$1.3 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to ensure that the information required to be disclosed in the reports we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (b) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As the end of the period covered by this ~~Quarterly Report~~quarterly report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness and design and operation of such disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange ~~Act.~~Act as of September 30, 2017. Based on ~~that~~this evaluation, our management identified certain design deficiencies in our internal control over financial reporting related to the lack of sufficient controls surrounding our international business policies, practices, monitoring and training as described below. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that ~~as a result of a material weakness in our internal control over financial reporting,~~ our disclosure controls and procedures were ~~not effective~~designed and operating effectively as of ~~December 31, 2016.~~

~~Audit Committee Independent Review~~

~~As we have previously disclosed in Item 9A of our Annual Report on Form 10-K for the year ended June~~September 30, 2016, the Audit Committee of our Board of Directors conducted an independent review related to the distribution of our products into countries outside the U.S. in which those products are not registered or that otherwise impose stringent restrictions on our direct selling model, and the associated revenue and tax and other accruals associated with such sales. This independent review was initiated following internal reviews by Company personnel, which were further informed by the content of employee complaints. The Audit Committee retained independent counsel to assist it in conducting the review. Based on its independent review, the Audit Committee determined that (i) we had sold our products to independent distributors who carried or shipped such products primarily into four countries outside the U.S. in which those products are not registered or that otherwise impose stringent restrictions on our direct selling model; (ii) we allowed individuals who were resident in countries that impose stringent restrictions on our direct selling model to enroll as independent distributors; and (iii) we did not have in place sufficient controls governing our international business policies, practices, monitoring and training to provide reasonable assurance that such distribution of our products complied with applicable customs, duties and other regulatory requirements. The inadequate controls and processes related to the lack of documented country-specific policies and procedures governing the (i) distributor enrollment policies and procedures; (ii) approved distributor payment and collection methods; (iii) methods for shipping and order fulfillment; (iv) approval requirements for transactions with distributors outside of our approved compensation plans; and (v) lack of change controls related to changes to existing country-specific policies and procedures. In addition, we had inadequate controls in place related to the training, monitoring and oversight of our personnel who were involved with our international business operations. Accordingly, we identified a material weakness in our internal controls over financial reporting.

Notwithstanding this material weakness, our management and Audit Committee concluded that the revenue related to the sales that were the subject of the Audit Committee’s independent review was properly recognized and that no tax or other accruals relating to such sales were necessary. In making this determination, we obtained international tax and legal advice from external accounting and law firms that have relevant country-specific expertise regarding our potential obligations and liabilities associated with the import and distribution of our products into the countries described above.

~~Remediation Efforts to Address Material Weakness~~

To remediate the material weakness in our internal controls over financial reporting described above, we are developing and implementing new control policies and procedures regarding the international business policies, practices, monitoring and training for each country outside the U.S. in which we do business. As an initial step, we implemented changes to our systems and distributor enrollment requirements intended to stop or restrict the processes used by independent distributors to purchase and carry or ship our products into countries in which those products are not registered or that otherwise impose stringent restrictions on our direct selling model. We are in the process of developing appropriate country-specific policies and procedures to help ensure that our products are not distributed or sold into countries without complying with applicable customs, tax and other regulatory requirements. Additional steps we have taken and are taking to remediate the material weakness in our internal controls over financial reporting include creating market-specific policy manuals documenting the following:

~~distributor enrollment requirements by country, including the requirement of sufficient and appropriate oversight and senior management approvals for any changes to such country-specific policies;~~

approved distributor payment and collection policies by country, including the requirement of sufficient and appropriate oversight and senior management approvals for any changes to such country-specific policies;

approved shipping, order fulfillment and customs import policies by country, including the requirement of sufficient and appropriate oversight and senior management approvals for any changes to such country-specific policies; and

~~approval requirements for transactions between us and independent distributors outside of our approved compensation plans.~~

In addition, as we implement country-specific policies, we are requiring that we obtain international tax and legal advice from external accounting and law firms that have relevant country-specific expertise to help ensure that potential international tax and legal issues are appropriately identified and addressed. We have also started the process of evaluating and re-allocating personnel resources to ensure that each market has adequate resources to support our remediation efforts and our new processes and controls. We are also in the process of establishing and conducting company-wide training programs on our new policies and controls.

These actions are subject to ongoing review by our management, including our Chief Executive Officer and Chief Financial Officer, as well as oversight by our Audit Committee. Although we plan to complete this remediation process as quickly as possible, the material weakness in our internal control over financial reporting will not be considered remediated until the applicable remedial processes and controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As a result, we cannot, at this time, estimate when such remediation will be completed. In addition, the remediation steps we have taken, are taking and expect to take may not effectively remediate the material weakness, in which case our internal control over financial reporting would continue to be ineffective.2017.

Changes in Internal Control over Financial Reporting

Except as described above, there were no changes in our internal controls over financial reporting during the quarter ended ~~December 31, 2016~~September 30, 2017 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

~~Inherent Limitations on Effectiveness~~An evaluation required by paragraph (d) of ~~Controls~~

~~Our~~Rules 13a-15 and 15d-15 of the Exchange Act was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and ~~our~~ Chief Financial Officer, ~~cannot provide absolute assurance that our disclosure controls or~~of any change in our internal control over financial reporting ~~will prevent~~that occurred during our last fiscal quarter. That evaluation did not identify any changes in our internal control over financial reporting during the three months ended September 30, 2017 that have materially affected, or ~~detect all error and all fraud. A~~are reasonably likely to materially affect, our internal control ~~system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design~~over financial reporting.

Inherent Limitations of ~~a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because~~Internal Control Over Financial Reporting

Because of the inherent limitations ~~in all~~of internal control ~~systems, no evaluation~~over financial reporting, including the possibility of collusion or improper management override of controls, ~~can provide absolute assurance that~~material misstatements due to error or fraud ~~will~~may not ~~occur~~be prevented or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in partdetected on ~~certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections~~a timely basis. Also, projections of any evaluation of ~~controls~~the effectiveness of the internal control over financial reporting to future periods are subject to ~~risks. Over time,~~the risk that the controls may become inadequate because of changes in conditions, or ~~deterioration in~~that the degree of compliance with the policies or ~~procedures.~~procedures may deteriorate.

PART IIII. Other Information

Item 1. Legal Proceedings

See Note 6 of the ~~Notes~~notes to the ~~Condensed Consolidated Financial Statements~~condensed consolidated financial statements contained within this ~~Quarterly Report~~quarterly report on Form 10-Q for a discussion of the Company's legal proceedings.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in “Part I. Item 1A — Risk Factors” in our ~~Annual Report~~annual report on Form 10-K for the fiscal year ended June 30, ~~2016,~~2017, filed on ~~December 12, 2016.~~September 7, 2017. The risks and uncertainties described in such risk factors and elsewhere in this report have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. As of the date of this report, we do not believe that there have been any material changes to the risk factors previously disclosed in our recent SEC filings, including the risk factors discussed in “Part I. Item 1A — Risk Factors” in our ~~Annual Report~~annual report on Form 10-K for the fiscal year ended June 30, ~~2016,~~2017, filed on ~~December 12, 2016.~~September 7, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~There were no shares of our common stock issued during the three months ended December 31, 2016 due to the exercise of warrants.~~

~~We did not purchase any shares of our common stock during the quarter ended December 31, 2016.~~

~~During the quarter ended December 31, 2016, we withheld 5,880 shares to satisfy tax withholding obligations in connection with the partial vesting of restricted stock awards.~~None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See the exhibit index immediately following the signature page of this report.

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~



	~~LIFEVANTAGE CORPORATION~~

~~Date: February 8, 2017~~	~~/s/~~ ~~Darren Jensen~~
	~~Darren Jensen~~ ~~Chief Executive Officer~~ ~~(Principal Executive Officer)~~

~~Date: February 8, 2017~~	~~/s/ Gary Koos~~
	~~Gary Koos~~ ~~Interim Chief Financial Officer~~ ~~(Principal Financial Officer)~~

Exhibit Index



Exhibit No.	Document Description	Filed Herewith or Incorporate by Reference From

~~10.1~~	~~Separation Agreement and General Release between Robert Urban and the Company~~	~~Filed herewith~~

31.1	Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a)	Filed herewith

31.2	Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a)	Filed herewith

32.1*	Certification of principal executive officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	~~Filed~~Furnished herewith

32.2*	Certification of principal financial officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	~~Filed~~Furnished herewith

101	The following financial information from the Company’s ~~Quarterly Report~~quarterly report on Form 10-Q for the quarter ended September 30, ~~2016~~2017 formatted in XBRL (extensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets at ~~December 31, 2016~~September 30, 2017 and June 30, ~~2016;~~2017; (ii) Unaudited Condensed Consolidated Statements of Operations and Other Comprehensive Income for the three ~~and six~~ months ended ~~December 31, 2016~~September 30, 2017 and ~~2015;~~2016; (iii) Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the ~~six~~three months ended ~~December 31, 2016;~~September 30, 2017; (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~December 31, 2016~~September 30, 2017 and ~~2015;~~2016; and (v) Notes to Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text	Filed herewith



*		This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Exchange Act and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		LIFEVANTAGE CORPORATION

Date:	November 8, 2017	/s/ Darren Jensen
		Darren Jensen Chief Executive Officer (Principal Executive Officer)

Date:	November 8, 2017	/s/ Steven R. Fife
		Steven R. Fife Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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