LifeVantage Corporation — Q2 FY2020 Form 10-Q
Business context and period: LifeVantage sells nutraceutical, skin and hair care, and related products through independent distributors and direct sales in international markets. This unaudited quarterly report covers the three and six months ended December 31, 2019; comparisons are to the same periods in 2018.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $61.2 million | $58.2 million | $117.5 million | $113.8 million |
| Gross profit / margin | $51.0 million / 83.3% | $48.4 million / 83.2% | $98.0 million / 83.5% | $94.8 million / 83.3% |
| Operating income | $3.6 million | $0.6 million | $6.2 million | $1.9 million |
| Net income | $4.3 million | $0.8 million | $6.1 million | $1.7 million |
| Diluted EPS | $0.30 | $0.06 | $0.42 | $0.12 |
- Quarterly revenue rose 5.3%; six-month revenue rose 3.2%. Quarterly operating margin was approximately 6.0%, versus 1.0% a year earlier.
- For the quarter, commissions and incentives were $29.2 million (47.7% of revenue), down from 48.4% of revenue. SG&A was $18.1 million (29.6% of revenue), down from 33.7%. Management attributed lower SG&A largely to lower event and employee compensation costs; gross margin improved with lower inventory obsolescence and handling costs and changes in sales mix.
- Six-month operating cash flow was $5.8 million, compared with $6.9 million. Investing cash use was $1.6 million, primarily equipment purchases; financing cash use was $8.4 million, including $3.4 million of share repurchases, $1.0 million of term-loan payments, and $4.4 million for tax withholding on shares.
- Cash and equivalents were $14.5 million at December 31, down from $18.8 million at June 30, 2019. Working capital was $12.4 million, down from $17.0 million. Total debt was approximately $0.5 million, the remaining term-loan balance; the credit facility includes a $5.0 million revolver. The company reported covenant compliance.
Changes, outlook, and notable items
- Revenue increased in both regions: Americas +4.3% for the quarter and Asia/Pacific & Europe +7.8%. New product launches, including Protandim NAD Synergizer and the Tri-Synergizer system, supported higher average order size. Australia and New Zealand grew strongly, while Greater China revenue fell 23.2% in the quarter.
- Active accounts declined 1.1% year over year to 182,000: active customers fell 3.4% to 114,000, while active distributors rose 3.0% to 68,000. Management cited subscription programs, product launches, international expansion, distributor training and compensation initiatives as priorities.
- No numerical full-year revenue or earnings guidance is provided. Management expected SG&A as a percentage of revenue to decrease over the remainder of fiscal 2020 and commissions and incentives as a percentage of revenue to fluctuate slightly. It stated existing cash and operating cash flow should meet requirements for at least 12 months.
- The company converted a $2.0 million loan plus accrued amounts into 1.0 million shares of Gig Economy Group, valued at $2.2 million. The early-stage investment is subject to valuation and funding risks; the company also paid GEG $1.1 million for software development during the six-month period. Two LifeVantage directors serve on GEG’s board.
- A purported class action remains pending. The court dismissed three claims in December 2019; plaintiffs filed an amended complaint renewing claims, including securities fraud. LifeVantage did not accrue a loss, stating liability was not probable or estimable, but warned an unfavorable outcome could materially affect results.
- The company signed an 11-year lease for a new headquarters beginning January 2021. It provides for no base rent during the first 12 months, while building and operating costs are payable; subsequent monthly rent escalates. Reported contractual operating lease obligations totaled $19.9 million.
- Other relevant risks include distributor retention and compliance, product acceptance and supply, international and foreign-exchange exposure, regulatory scrutiny of direct selling and products, and debt-covenant restrictions. The filing reported no probable loss contingencies requiring accrual and no material changes to previously disclosed risk factors.
Investor verification priorities
- Assess whether new products and regional growth can offset declining customer accounts and Greater China weakness.
- Review cash generation against buybacks, share-related tax withholding, working-capital needs, and the new headquarters lease commitment.
- Confirm the remaining term-loan repayment, revolver availability, covenant headroom, and the basis for management’s 12-month liquidity assessment.
- Track developments in the amended class-action lawsuit and the carrying value and prospects of the GEG investment.