Business context and reporting period
LifeVantage Corporation sells nutraceutical, personal-care and related products through a direct-sales network of independent distributors, with operations across the Americas and Asia/Pacific & Europe. The filing covers the quarter ended March 31, 2019 (fiscal 2019 Q3) and the nine months ended that date. The request metadata says “2018 Q3,” but the filing itself is for 2019 Q3.
Key financial results
Amounts below are in millions of dollars except per-share data. Quarterly and year-to-date comparisons are with the corresponding prior-year periods.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $56.0 vs. $50.6 | $169.8 vs. $149.2 |
| Gross profit / gross margin | $46.7 / 83.4% vs. $41.6 / 82.4% | $141.5 / 83.4% vs. $122.4 / 82.0% |
| Operating income | $2.2 vs. $2.3 | $4.1 vs. $6.0 |
| Net income | $1.8 vs. $1.6 | $3.5 vs. $2.8 |
| Diluted EPS | $0.12 vs. $0.12 | $0.24 vs. $0.20 |
| Operating cash flow | Not provided separately | $10.8 vs. $7.8 |
Quarterly revenue rose about 10.8%; nine-month revenue rose about 13.8%. Gross-margin improvement reflected prior price increases, lower inventory obsolescence and handling costs, and sales-mix changes. For the quarter, commissions and incentives were 48.6% of revenue (48.1% prior year), while SG&A was 30.9% (29.7%). Nine-month ratios were 49.0% and 31.9%, respectively.
Liquidity, debt and cash flow
At March 31, 2019, cash and cash equivalents were $15.9 million, working capital was $15.2 million, and current assets and current liabilities were $42.7 million and $27.5 million. Nine-month cash flow included $10.8 million from operations, $3.7 million used in investing (including a $2.0 million convertible note investment), and $7.8 million used in financing. Cash declined $0.7 million from June 30, 2018.
Term-loan principal was $2.0 million at period-end, with $1.939 million reported as current debt net of costs. The amended facility has a $5.0 million revolving-credit limit and a 5.68% fixed term-loan rate; the company reported covenant compliance. It believed cash and operating cash flow would meet requirements for at least 12 months. Contractual obligations included $8.9 million of operating leases and $23.8 million of other operating commitments.
Material changes, outlook and risks
- Revenue growth was broad-based: Americas revenue increased 6.2% in the quarter and 11.5% year to date; Asia/Pacific & Europe increased 24.8% and 20.5%. Growth in the latter region was driven mainly by newer and expanding markets; Japan’s nine-month revenue declined 3.6%.
- Active members increased 9.2% year over year to 189,000, including 68,000 distributors and 121,000 customers.
- Management expected commissions and incentives to decline slightly as a percentage of revenue for the remainder of fiscal 2019, and SG&A as a percentage of revenue to decrease, citing lower event spending and leverage of existing investments. It planned further European expansion and continued development of its China e-commerce model.
- The nine-month effective tax rate was 5.6%, versus 50.1% in the prior-year period, benefiting from discrete tax effects related to performance awards and return-to-provision adjustments. Management expected the rate to rise for the rest of fiscal 2019; future rates could fluctuate.
- Foreign exchange reduced revenue by $0.6 million in the quarter and $1.2 million year to date. Management estimated a 10% strengthening of the U.S. dollar against relevant currencies would have reduced nine-month revenue by $4.9 million.
- The company recognized approximately $0.5 million of revenue during the nine months from loyalty-point balances after discontinuing the program in December 2018. It also disclosed a $2.1 million GEG convertible note receivable, including accrued interest; a former director was GEG’s majority owner and an officer.
- A putative class action alleges, among other claims, anticompetitive conduct involving product patents. The company had not accrued a loss, considering liability not probable or estimable, but warned an unfavorable outcome could materially affect results or financial condition. Management disclosed no other probable loss contingencies requiring accrual.
Important facts for investors to verify
- Confirm the intended period: this is the Form 10-Q for the quarter ended March 31, 2019, not 2018 Q3.
- Track whether member growth and expansion in newer markets translate into sustained revenue and operating-income growth, particularly given higher incentive and SG&A ratios.
- Review covenant headroom, the amended credit facility and the company’s ability to meet debt and contractual obligations if cash generation weakens.
- Monitor the class action and other regulatory or legal developments; the filing does not quantify a potential loss for the lawsuit.
- Assess the quality and recurrence of earnings, including the unusually low year-to-date tax rate, stock-based compensation, and loyalty-program revenue recognition.
- Consider foreign-exchange exposure, inventory levels and the GEG note’s repayment or conversion outcome.