LifeVantage Corporation — Form 10-Q Summary
Period: Quarter ended March 31, 2015, with nine-month comparisons to March 31, 2014. The request metadata says “2014 Q3,” but the filing itself reports fiscal 2015 third-quarter results.
Business context
LifeVantage sells dietary supplements, skin-care products, pet supplements and energy drink mixes through independent distributors and preferred customers. Its reported regions are Americas and Asia/Pacific; management identifies distributor and customer activity, particularly in Japan, as important revenue drivers.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue, 2015 | $45.2 million | $145.0 million |
| Revenue, 2014 | $55.1 million | $157.9 million |
| Gross profit / margin, 2015 | $37.6 million / 83.3% | $124.3 million / 85.7% |
| Gross profit / margin, 2014 | $46.6 million / 84.6% | $133.7 million / 84.7% |
| Operating income, 2015 | $1.5 million | $12.3 million |
| Operating income, 2014 | $4.5 million | $14.7 million |
| Net income, 2015 | $0.6 million | $6.8 million |
| Net income, 2014 | $2.5 million | $9.0 million |
| Diluted EPS, 2015 / 2014 | $0.01 / $0.02 | $0.07 / $0.08 |
- Cash flow, nine months: Operating cash flow was $9.0 million versus $10.2 million a year earlier; capital expenditures were $1.1 million versus $1.7 million. Financing used $12.8 million, mainly for $9.9 million of share repurchases and $3.5 million of term-loan principal payments. Cash declined $5.0 million to $15.4 million.
- Liquidity: Working capital was $10.1 million, down from $17.3 million at June 30, 2014. Current assets were $34.9 million and current liabilities $24.8 million. Management said cash and operating cash flow should cover requirements for at least 12 months.
- Debt: Term-loan principal was $27.3 million at March 31, including $9.2 million current and $18.1 million long-term. The variable-rate loan averaged 8.75% interest during the nine months. A 100-basis-point rate change was estimated to affect annual interest expense by about $0.2 million.
Changes and drivers
- Revenue fell 18.0% in the quarter and 8.2% for the nine-month period. Management attributed the decline principally to lower Japan and Hong Kong sales and unfavorable foreign exchange; currency reduced revenue by $1.8 million in the quarter and $4.0 million year to date.
- Asia/Pacific revenue fell 45.4% in the quarter and 27.9% year to date. Japan revenue fell 49.6% and 32.9%, respectively. Americas revenue increased 0.8% in the quarter and 2.8% year to date.
- Active independent distributors declined 9.6% year over year to 66,000; preferred customers declined 14.9% to 114,000. Asia/Pacific distributor and preferred-customer counts were down 26.7% and 25.0%, respectively.
- Quarterly gross margin decreased, partly because prior-year cost of sales benefited from approximately $0.5 million of initial insurance recoveries. Nine-month gross margin improved, primarily reflecting approximately $2 million in settlement proceeds related to a December 2012 product recall.
- Operating expenses declined in dollars but rose as a share of revenue: 80.0% for the quarter versus 76.5%, and 77.2% year to date versus 75.4%. Lower commissions reflected weaker Japan revenue; nine-month SG&A increased on items including sponsorship, events and call-center labor.
- Quarterly SG&A included severance costs related to the separation of the President and CEO. The filing does not provide a clear dollar amount for those costs.
Outlook, risks and contingencies
- Management expected Japan revenue to decline in fiscal 2015 versus fiscal 2014, citing market contraction and distributor recruitment activity by former leaders. Legal action against the competing company was ongoing; management said resolution would take time. It expected revenue in Australia, Hong Kong and the Philippines to remain near the March-quarter level.
- Management expected commissions and incentives to increase slightly in the remainder of fiscal 2015 and sales and marketing expense to remain consistent, while continuing to invest in products, marketing and geographic expansion.
- Debt covenant concern: On May 1, 2015, after quarter-end, the company amended its credit agreement, reducing required trailing-four-quarter EBITDA for March 31 and June 30, 2015 to $17.0 million from $20.6 million and $21.3 million, respectively; reducing required unrestricted cash from $10.0 million to $8.0 million for those periods; and requiring $4.5 million of accelerated loan principal payments in fiscal Q4. The filing says the company was not compliant with the original March EBITDA covenant, while also describing compliance after giving effect to the amendment. Management warned it likely would not meet EBITDA covenants after June 30, 2015 without a significant EBITDA increase and was negotiating further revisions; failure could permit the lender to accelerate repayment.
- Listing risk: Nasdaq notified the company on April 1, 2015 that its share price had failed the $1.00 minimum bid-price rule for 30 consecutive business days. The initial cure period ran through September 28, 2015; delisting could reduce trading liquidity.
- The credit facility is secured by substantially all company assets and restricts additional debt, equity issuance, repurchases and certain other actions. Contractual obligations totaled $46.7 million, including $27.3 million debt principal, $4.9 million estimated interest and $14.5 million operating leases.
- Management stated that pending litigation was not expected to materially affect financial position or results. No off-balance-sheet arrangements were reported. The company disclosed no derivatives held at March 31, 2015.
- Other notable risks include foreign-exchange exposure, reliance on distributors and a significant product, regulatory and product-liability exposure, supply-chain dependence, and the possibility of failing future debt covenants. Management’s forward-looking statements are subject to these and other uncertainties.
Investor verification priorities
- Confirm the covenant calculations and the effect of the May 1 amendment, including any subsequent lender amendments, waivers, accelerated payments or default risk.
- Track Japan sales, distributor retention and customer counts, foreign-exchange effects, and progress of the dispute involving former distributors.
- Review cash generation, working capital, debt service and liquidity against the required cash minimum and upcoming loan payments.
- Check Nasdaq bid-price compliance and any subsequent listing notices or cure actions.
- Assess whether margin changes and recall-related settlement proceeds are recurring, and determine the amount and continuing impact of CEO-separation costs.