LifeVantage Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of LifeVantage’s fiscal 2019 (not calendar-year 2018 Q1). Comparative period is the three months ended September 30, 2017. Amounts below are in U.S. dollars.
Business context and results
LifeVantage sells nutraceutical supplements and skincare products through a direct-selling network of independent distributors and customers. It reports one operating segment and revenue across the Americas and Asia/Pacific & Europe.
- Revenue was $55.6 million, up 13.2% from $49.1 million. The Americas increased 13.6% to $41.1 million; Asia/Pacific & Europe increased 12.1% to $14.5 million. Japan revenue declined 7.4% to $10.1 million.
- Gross profit was $46.4 million, with gross margin of 83.5%, up from 82.2%. Management attributed the margin improvement to a price increase and product mix.
- Operating income was $1.3 million versus $1.4 million; operating margin was approximately 2.4% versus 2.8%. Operating expenses rose to $45.1 million, or 81.1% of revenue, from $39.0 million, or 79.4%.
- Commissions and incentives increased to $27.8 million, or 50.0% of revenue, from $23.4 million, or 47.6%, reflecting promotional programs and incentive events. SG&A rose to $17.3 million from $15.6 million, primarily due to U.S. and Japan events and higher stock compensation.
- Net income was $0.9 million versus $0.8 million; diluted EPS was $0.06 versus $0.06. Income tax expense was $0.3 million and the effective tax rate was 21.8%, compared with 35.1%, mainly reflecting U.S. tax reform and favorable discrete items.
- Operating cash flow was $2.4 million versus $2.5 million. Investing used $1.5 million, including a $1.4 million convertible note investment and $0.1 million of equipment purchases. Financing used $0.3 million, including $0.5 million of term-loan principal payments, partly offset by option exercises. Cash increased $0.5 million to $17.1 million.
Financial position and material changes
- At September 30, cash was $17.1 million, working capital was $16.9 million, and current liabilities were $23.6 million. Total assets were $51.9 million and stockholders’ equity was $23.5 million.
- Debt principal totaled $5.0 million: $2.0 million current and $3.0 million long term. The term loan carries a fixed 5.68% rate and matures March 31, 2021. The company reported compliance with financial and other applicable covenants.
- The amended credit facility raised minimum working capital to $8.0 million and includes fixed-charge-coverage and liabilities-to-tangible-net-worth tests. It also restricts certain borrowing, investments and equity repurchases. Management said cash and operating cash flow should cover requirements for at least 12 months.
- Active customers increased 9.2% year over year to 119,000; active independent distributors increased 4.8% to 66,000. Taiwan completed its first full fiscal quarter, and the company opened on-the-ground operations in Austria.
- Foreign exchange reduced revenue by approximately $0.3 million overall; Japan’s constant-currency revenue declined 6.9%. A hypothetical 10% strengthening of the U.S. dollar against relevant currencies would have reduced quarterly revenue by about $1.6 million, or 2.8%.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expected commissions and incentives as a percentage of revenue to decrease slightly for the rest of fiscal 2019 as promotional investments are refined; SG&A as a percentage of revenue was also expected to decrease slightly. Both expense lines may fluctuate with launches, events and incentive timing.
- Management cited continued investment in the red carpet program, international expansion, and distributor training and technology. It also said it was refining its mainland China e-commerce model.
- A purported class action, Smith v. LifeVantage, alleges unlawful business practices and, in an amended complaint, adds an antitrust claim concerning product patents. The company has not accrued a loss, says liability is not probable or estimable, and intends to defend the case; it warned an unfavorable outcome could materially affect the business.
- The company invested $1.4 million in a convertible promissory note to Gig Economy Group, bearing 8% interest and maturing May 31, 2019. A former director was GEG’s majority owner and an officer; GEG also provided software development services.
- Topic 606 was adopted July 1, 2018 using the modified retrospective method, with an immaterial opening retained-earnings adjustment and a $0.1 million reduction in quarterly revenue. The company expected adoption of the new lease standard to add right-of-use assets and lease liabilities to its balance sheet.
- Key risks include distributor recruitment and retention, product and market acceptance, regulatory scrutiny of direct selling and products, litigation, foreign exchange, reliance on third-party manufacturers, and debt covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and customer/distributor gains persist, particularly given Japan’s decline and the relative contribution of newer markets.
- Whether promotional spending can be moderated while sustaining growth and improving operating margins.
- Progress and outcome of the class action, and any subsequent changes to the company’s assessment of potential loss.
- Terms, collectability and any repayment or conversion of the GEG note, including the related-party relationship.
- Ongoing covenant compliance, scheduled debt payments, and the balance-sheet impact of lease-standard adoption.