Lifevantage Corp quarterly report, Q1 FY2015

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LifeVantage Corporation — Q1 FY2015 Form 10-Q

Reporting period: Three months ended September 30, 2014; comparisons are with the three months ended September 30, 2013 unless noted. The unaudited statements cover the company’s direct-selling nutraceutical and skin-care business across the Americas and Asia/Pacific.

Financial performance

  • Revenue: $51.6 million, up 0.6% from $51.3 million. Foreign exchange reduced revenue by approximately $0.7 million.
  • Regional results: Americas revenue rose 5.7% to $36.5 million; Asia/Pacific revenue fell 9.8% to $15.2 million. Japan revenue declined 16.4% to $12.2 million, reflecting weaker distributor and customer activity and yen depreciation.
  • Profitability: Gross profit was $46.0 million; gross margin was 89.0%, versus 84.8%. Operating income increased to $7.8 million from $5.1 million. Net income rose to $4.7 million from $3.3 million; diluted EPS was $0.05 versus $0.03.
  • Costs and taxes: Operating expenses were $38.2 million versus $38.4 million. SG&A increased to $13.6 million, while commissions and incentives decreased to $24.6 million. Income tax expense was $2.4 million; the effective tax rate was 34.1%.
  • Cash flow: Operating cash flow was $5.1 million, compared with $4.9 million. Capital expenditures were $0.2 million, implying operating cash flow less capital expenditures of approximately $4.8 million. Cash increased $1.7 million to $22.1 million.
  • Liquidity: Working capital was $20.4 million, up from $17.3 million at June 30, 2014. Current assets were $43.8 million and current liabilities $23.4 million.
  • Debt: Term-loan principal was $29.7 million, including $4.7 million current; the loan bears variable interest, with an average rate of 8.75% in the quarter. Interest expense was $0.8 million versus $3,000 a year earlier. The company reported compliance with its debt covenants.

Changes and unusual items

  • Gross margin benefited from approximately $2 million of settlement proceeds related to a December 2012 product recall; the filing identifies this as the primary reason cost of sales declined as a share of revenue.
  • Active independent distributors increased 1.5% to 68,000, while active preferred customers declined 9.4% to 126,000.
  • The company repurchased 1.45 million shares for approximately $2.0 million during the quarter, with another $2.0 million authorized under the program. Weighted-average basic shares fell to 99.6 million from 114.7 million.
  • Inventory increased to $11.0 million from $8.8 million, while the obsolescence reserve remained $0.7 million.
  • Other expense was $0.6 million, primarily reflecting term-loan interest, partly offset by foreign-currency gains. The company reported a $0.1 million foreign-currency loss on transactions and a $0.3 million realized gain on settled forward contracts.

Outlook, risks and contingencies

  • Management expects cash, cash flow from operations and working-capital resources to meet requirements for at least 12 months. It anticipates operating expenses as a percentage of revenue will remain relatively consistent, with slight increases in commissions, R&D and sales and marketing expenses.
  • Management plans to focus on product development, sales and marketing, and geographic support and expansion. Axio energy drink mixes launched in October 2014; the company recognized revenue in September from pre-launch sales.
  • Key exposures include reliance on distributors and the Protandim product, distributor/customer retention, weaker Japanese sales and currency movements, international operations, product acceptance and supply, regulation of direct selling and supplements, litigation, and debt covenants. A 10% strengthening of the U.S. dollar would have reduced quarterly revenue by an estimated 2.9%, or $1.5 million. A 100-basis-point rate change would alter annual interest expense by approximately $0.3 million.
  • The credit facility restricts, among other things, additional borrowing, share repurchases and dividends without lender approval. Management reported covenant compliance and expected continued compliance in the ensuing year. No off-balance-sheet arrangements were reported.
  • The company reported no legal proceedings in Part II; management separately stated that pending ordinary-course disputes were unlikely to have a material effect. Disclosure controls were considered effective, with no material change in internal control reported.

Important facts for investors to verify

  • How much of the reported margin improvement is attributable to the one-time recall settlement, and how margins perform without it.
  • Whether Japan revenue and the declining preferred-customer base stabilize, and whether distributor growth translates into sustained sales.
  • The sustainability of operating cash flow as inventory and prepaid expenses rise, and the effect of share repurchases on liquidity.
  • Debt principal repayment needs, variable-rate exposure, covenant headroom and restrictions on capital allocation.
  • The filing provides no quantified full-year revenue or earnings guidance; monitor execution and costs associated with Axio, TrueScience and geographic expansion.