LifeVantage Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended September 30, 2012; comparisons are with the three months ended September 30, 2011 unless noted. Amounts are in U.S. dollars.
Business context
LifeVantage sells nutraceutical and skin-care products, primarily through independent distributors and network marketing. Its principal products include Protandim and LifeVantage TrueScience. The company reports one operating segment and revenues across the Americas and Asia/Pacific.
Financial results and liquidity
| Metric | Q1 FY2013 | Prior period |
|---|---|---|
| Net sales | $52.859 million | $20.083 million |
| Gross profit / margin | $45.052 million / 85.2% | $17.126 million / 85.3% |
| Operating income | $6.907 million | $3.430 million |
| Net income | $4.165 million | $3.724 million |
| Basic / diluted EPS | $0.04 / $0.03 | $0.04 / $0.02 |
| Operating cash flow | $0.915 million | $3.339 million |
| Capital expenditures and investing cash flow | $1.567 million used | $0.369 million used |
Sales increased 163%. By region, Americas revenue was $32.306 million (prior period $15.317 million) and Asia/Pacific revenue was $20.553 million ($4.766 million). U.S. sales rose by $16.8 million and Japan sales by $14.8 million, according to management.
Sales and marketing expense rose to $29.540 million from $10.543 million, primarily reflecting distributor commissions, higher headcount, and promotional events. General and administrative expense increased to $7.853 million from $2.839 million. Research and development expense was $0.514 million, up from $0.234 million. The effective tax rate was approximately 39%, and income tax expense rose to $2.701 million from $0.472 million.
Cash and cash equivalents were $25.178 million at September 30, versus $24.648 million at June 30, 2012. Working capital was $26.250 million, compared with $22.800 million at June 30. Operating cash flow fell year over year, which management attributed mainly to income taxes paid, lower accounts payable, increased inventory, and lease deposits. Financing provided $1.187 million, principally from option and warrant exercises.
No funded debt is reported on the balance sheet. Total liabilities were $15.902 million, including $15.497 million in current liabilities. Contractual operating lease obligations totaled $20.074 million. Inventory was $13.066 million, up from $11.353 million at June 30; the company reported $0.233 million of inventory obsolescence costs, primarily for obsolete marketing materials.
Changes, outlook, and risks
Management expects gross margin to remain around the current level and operating expenses to rise with sales and business growth. It intends to commit up to approximately 2% of net sales to research and development in future periods. Management believes available cash and expected future operating cash flow will fund operations for at least 12 months, but notes that sales below expectations could require expense reductions or additional financing, potentially diluting shareholders. No formal revenue or earnings guidance is provided.
On September 20, 2012, the company signed a 10-year lease for approximately 44,353 square feet of new headquarters space, with initial monthly base rent of $86,858.23 and scheduled increases. The company anticipated taking possession around August 31, 2013.
An October 2012 shareholder class-action complaint, filed after quarter-end, challenges disclosures relating to the company’s executive-compensation advisory vote and alleges fiduciary-duty violations. Management considers the suit without merit and intends to defend it; it stated that a material loss was not reasonably possible, while acknowledging litigation uncertainty.
Key risks include dependence on a limited product range and distributor network, retaining and recruiting distributors, regulatory compliance (including in Japan and for network marketing), competition, product and intellectual-property claims, reliance on third-party manufacturers, international operations, and the ability to sustain sales and cash generation. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether rapid U.S. and Japan sales growth can be sustained and translated into stronger operating cash flow.
- How distributor commissions, staffing, promotion, and other growth-related costs affect operating margins.
- Inventory levels, product returns, and the adequacy of the $0.611 million returns reserve.
- The dilution impact of outstanding options, warrants, and share issuances; common shares outstanding were 112.848 million at September 30, 2012.
- The terms and long-term cost of the new headquarters lease, as well as the status and potential outcome of the post-quarter shareholder lawsuit.
- Cash concentration: the filing states that balances exceeded federally insured limits, including $13.7 million held primarily at one financial institution and $10.0 million in an investment management account.