LifeVantage Corporation — Q2 FY2016 Form 10-Q
Reporting period: Fiscal quarter and six months ended December 31, 2015. Unaudited results; amounts below are in U.S. dollars, generally millions unless otherwise stated.
Business context
LifeVantage develops and sells nutraceutical supplements and skin-care products through independent distributors and customers in the Americas and Asia/Pacific. Key products include Protandim, TrueScience, Canine Health, Axio and PhysIQ. Management identifies distributor and customer attraction and retention, product innovation, and international expansion as central to growth.
Financial performance and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $52.0 | $48.2 | $97.3 | $99.9 |
| Gross profit | $44.2 | $40.8 | $82.5 | $86.7 |
| Gross margin | 84.9% | 84.5% | 84.8% | 86.8% |
| Operating income | $3.0 | $3.1 | $5.7 | $10.9 |
| Net income | $1.6 | $1.5 | $2.7 | $6.2 |
| Diluted EPS | $0.11 | $0.10 | $0.19 | $0.43 |
| Operating cash flow | Not presented quarterly | $8.5 | $8.0 |
- Quarterly revenue increased 7.8% year over year, while six-month revenue declined 2.5%. Six-month operating income fell about 47% and net income about 57% year over year.
- Q2 commissions and incentives rose to $27.3 million from $23.2 million, largely reflecting higher sales and promotional programs. SG&A declined to $13.8 million from $14.5 million. For the six-month period, SG&A was $27.5 million versus $28.1 million.
- Cash and cash equivalents were $15.8 million at December 31, up from $13.9 million at June 30. Working capital was $1.7 million, down from $4.6 million. Six-month investing cash use was $0.3 million and financing cash use was $6.3 million, including $6.8 million of term-loan principal payments.
- Term-loan principal totaled $14.8 million at period-end; $12.2 million was classified as current and $2.6 million as long-term principal. The facility bears variable interest; the six-month average rate was 8.75%. Interest expense for six months was $1.4 million.
- Six-month effective tax rate was 35.4%. No off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Changes versus the prior comparable period
- Americas revenue rose 14.3% in Q2 and 4.6% for six months; U.S. sales increased 15.0% and 5.2%, respectively. Asia/Pacific revenue fell 9.6% in Q2 and 20.5% for six months, including Japan declines of 11.7% and 21.3%.
- Foreign exchange reduced revenue by approximately $0.9 million in Q2 and $2.8 million in the six-month period. Japan’s weaker yen was a principal factor; management also cited lower Japan sales volume for the six-month comparison.
- Six-month gross margin fell two percentage points, partly because the prior-year period included about $2 million of settlement proceeds related to a December 2012 product recall, recorded as a reduction to cost of sales. Q2 margin improved, in part due to inventory rework benefits and favorable raw-material pricing.
- Active preferred customers were 117,000, down 1.7% year over year; active independent distributors were 67,000, unchanged overall. Asia/Pacific distributors declined 8.7% while Americas distributors rose 4.5%.
Outlook, risks and unusual items
- Management expected to begin selling in the United Kingdom during Q3 FY2016 and expected new products, including TrueScience Micro-Lift Serum and PhysIQ, and continued Americas initiatives to support revenue growth. It expected commissions and incentives to increase slightly during the remainder of FY2016 and SG&A to remain generally consistent. No quantified full-year revenue or earnings guidance was provided.
- The amended credit facility requires accelerated monthly principal payments of $0.5 million and quarter-end payments of unrestricted cash above $12.5 million. It also contains EBITDA, leverage, fixed-charge and liquidity covenants. LifeVantage reported compliance at December 31, 2015, but said it likely would not meet EBITDA covenants for periods after June 30, 2016 without a significant EBITDA increase and would seek further covenant revisions. Failure to reach an amendment could result in default and accelerated repayment.
- Management stated cash and expected operating cash flow should cover requirements for at least 12 months, but noted funding alternatives may be restricted by debt covenants and may not be available on acceptable terms.
- Other disclosed risks include Japan distributor challenges, foreign exchange exposure, dependence on distributors and a limited product portfolio, regulatory and product-liability risks, supply-chain and IT/cybersecurity risks, and debt service and covenant constraints. A 10% U.S. dollar strengthening would have reduced six-month revenue by an estimated $2.3 million; a 100-basis-point rate change would affect annual interest expense by about $0.1 million.
- The product-return reserve was approximately $0.5 million at December 31, compared with $0.1 million at June 30. The filing reported no legal proceedings in Part II and stated recorded litigation accruals were considered appropriate.
Important facts for investors to verify
- Whether LifeVantage can achieve the required EBITDA and other covenant tests after June 30, 2016, and whether the lender will agree to further amendments.
- How accelerated debt repayments affect cash, working capital and the company’s ability to fund operations and growth initiatives.
- Whether Japan sales and distributor activity stabilize, and whether Americas growth can offset Asia/Pacific weakness and currency effects.
- Whether recently launched products generate sustained sales, and whether the higher product-return reserve or inventory levels indicate changing demand or returns.
- Underlying operating performance excluding prior-year recall settlement proceeds and the effect of foreign exchange.