LifeVantage Corporation — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017. LifeVantage sells nutraceutical, skin-care and related products through independent distributors and customers. Its business operates as one segment, with revenue reported for the Americas and Asia/Pacific & Europe.
Financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $49.5 | $48.9 | $98.6 | $103.8 |
| Gross profit | $40.4 | $41.4 | $80.8 | $87.5 |
| Gross margin | 81.6% | 84.7% | 81.9% | 84.3% |
| Operating income | $2.3 | $0.7 | $3.7 | $2.7 |
| Net income | $0.3 | $0.3 | $1.1 | $1.5 |
| Diluted EPS | $0.02 | $0.02 | $0.08 | $0.10 |
- Q2 revenue rose about 1.1% year over year; six-month revenue fell about 5.0%. Q2 operating income improved, while six-month net income declined.
- Lower gross margin reflected product and geographic mix, free shipping on product bundles, and higher inventory obsolescence, storage, handling and shipping costs.
- Operating expenses fell to $38.0 million in Q2 from $40.7 million and to $77.0 million for six months from $84.8 million. Management attributed lower SG&A principally to reduced audit-review-related legal and accounting costs and lower professional, transition and litigation expenses.
- Q2 and six-month tax expense was $1.7 million and $2.2 million, respectively. The Tax Cuts and Jobs Act remeasurement reduced deferred tax assets by approximately $1.2 million; management reported effective tax rates of 84.6% for Q2 and 65.8% for the six months.
Cash, debt and liquidity
- Cash and cash equivalents were $12.8 million at December 31, 2017, up $1.3 million from June 30, 2017. Working capital was $12.6 million, versus $12.2 million.
- Six-month operating cash flow was $4.7 million, compared with $5.1 million a year earlier; capital expenditures were $2.1 million, versus $0.2 million. Financing cash outflow was $1.3 million, including $1.0 million of term-loan repayments and $0.25 million of share repurchases.
- Term-loan principal outstanding was $6.5 million, including $2.0 million current and $4.5 million long-term. The loan bears fixed interest of 4.93% and matures March 2019. The company reported compliance with its financial and other covenants at quarter-end.
- Management said cash and expected operating cash flow should meet requirements for at least the next 12 months. The credit facility restricts certain additional borrowing and equity repurchases without lender approval.
Business changes, outlook and risks
- Americas revenue declined 1.9% in Q2 and 6.0% for six months. U.S. revenue declined 2.0% and 7.0%, respectively; management cited distributor/customer effects associated with post-review policy changes. Japan revenue increased 9.3% in Q2 and 5.6% for six months, while Hong Kong revenue fell sharply. Foreign currency reduced total revenue by $0.1 million in Q2 and $0.9 million for six months.
- Active preferred customers decreased 2.7% year over year to 108,000; active distributors decreased 1.6% to 62,000. Management identified the distributor and customer base as a key driver of sales.
- The company began a commercial pilot of its China e-commerce model and anticipated a full launch in Q3 FY2018. It also launched operations in Germany. These are plans and developments, not quantified revenue guidance.
- Management expected commissions and incentives to remain relatively stable as a percentage of sales, with possible fluctuations, and SG&A as a percentage of revenue to remain relatively consistent for the rest of FY2018. The filing gives no specific revenue or earnings forecast.
- Key risks include recruiting and retaining distributors, market and product acceptance, regulatory compliance in direct selling and international markets, foreign-exchange exposure, inventory obsolescence, reliance on third-party manufacturing, and IT-system implementation and cybersecurity. The company specifically highlighted planned enterprise software implementations as a risk.
- The securities class action and several related derivative actions were dismissed; the company reported no payment of consideration. Management reported no probable loss contingencies requiring accrual. The filing notes that other ordinary-course claims or regulatory matters could arise.
Important facts for investors to verify
- Whether distributor/customer counts and U.S. and Hong Kong sales stabilize, and whether growth in Japan and other markets continues.
- Whether gross-margin pressure and inventory obsolescence costs persist; the inventory obsolescence reserve rose to $1.4 million from $0.9 million at June 30, 2017.
- The effect of the tax-law-related deferred-tax remeasurement on reported earnings, and subsequent tax rates and cash taxes.
- Progress and costs of the China e-commerce launch and enterprise software implementations, along with compliance with debt covenants and the March 2019 loan maturity.
- The execution and remaining capacity of the $5 million share-repurchase authorization; $0.25 million had been used by December 31, 2017.