LifeVantage Corporation — Form 10-Q Summary
Period: Quarter ended March 31, 2018; the filing also reports nine-month results for the period ended March 31, 2018. The request metadata labels this “2017 Q3,” but the filing itself is for fiscal 2018 Q3.
Business context and reporting period
LifeVantage sells nutraceutical supplements and skincare products through a direct-selling network of independent distributors and customers. Its markets are reported in the Americas and Asia/Pacific & Europe. Results are unaudited; interim performance is not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Revenue | $50.6 million | $45.0 million | $149.2 million | $148.8 million |
| Gross profit | $41.6 million | $36.8 million | $122.4 million | $124.3 million |
| Gross margin | 82.4% | 81.7% | 82.0% | 83.5% |
| Operating income | $2.3 million | $0.2 million | $6.0 million | $2.9 million |
| Net income | $1.6 million | $0.1 million | $2.8 million | $1.5 million |
| Diluted EPS | $0.12 | $0.00 | $0.20 | $0.11 |
- Cash flow, nine months: Operating cash flow was $7.8 million versus $4.6 million. Investing used $3.4 million, primarily for technology and fixed assets, versus $0.5 million. Financing used $2.0 million, including $1.5 million of term-loan principal payments and $0.5 million of share repurchases.
- Balance sheet at March 31, 2018: Cash was $14.0 million; working capital was $13.5 million. Total assets were $50.9 million and stockholders’ equity was $19.3 million. Debt principal was $6.0 million ($2.0 million current and $4.0 million long-term); the balance-sheet carrying value of long-term debt, net of discount and costs, was $4.0 million.
- Other metrics: SG&A was $15.0 million for the quarter and $45.2 million year to date. Commissions and incentives were $24.3 million and $71.1 million, respectively. Nine-month income tax expense was $2.8 million.
Material changes versus prior comparable periods
- Quarterly revenue rose 12.3%, while nine-month revenue was nearly flat. Quarterly operating income and net income increased substantially from low prior-year levels; nine-month operating income and net income also improved.
- Quarterly gross margin improved, attributed to lower inventory-obsolescence costs and sales mix. Nine-month gross margin declined, with the filing citing product and geographic mix, free shipping on product bundles, and higher inventory storage, handling, shipment, and obsolescence costs.
- Quarterly revenue increased 10.6% in the Americas and 18.0% in Asia/Pacific & Europe. Nine-month Americas revenue declined 0.9%, while Asia/Pacific & Europe revenue rose 3.7%. Hong Kong revenue fell 76.2% year to date after compliance-related policy changes; Japan revenue rose 7.0% year to date.
- Nine-month SG&A fell from $48.7 million to $45.2 million, largely due to lower legal, accounting, and professional-services expenses. Quarterly SG&A increased, partly because of a U.S. sales event and higher employee compensation.
- The 2017 U.S. tax law reduced the corporate rate but required remeasurement of deferred tax assets. The approximately $1.2 million reduction in deferred tax assets increased the year-to-date effective tax rate to 50.1%.
Outlook, commentary, risks, and unusual items
- Management said cash and expected operating cash flow should cover requirements for at least the next 12 months. It expected commissions and incentives to rise slightly as a percentage of revenue during the remainder of fiscal 2018, while SG&A as a percentage of revenue was expected to remain relatively consistent. The filing does not provide numerical revenue or earnings guidance.
- On May 4, 2018, after quarter-end, the company amended its credit facility: maturity moved from March 2019 to March 2021 and the term-loan rate increased from 4.93% to 5.68%. Financial covenants were revised, including an $8.0 million minimum working-capital requirement. The company reported covenant compliance at March 31 and anticipated continued compliance.
- A purported class action filed in January 2018 alleges the company and executives operated a pyramid scheme. The company is seeking dismissal and venue transfer and intends to defend the case; it recorded no accrual because it considered a loss not probable or estimable, while warning an unfavorable outcome could materially affect the business. Earlier securities and derivative lawsuits were dismissed.
- The company repurchased 106,000 shares for $0.5 million during the nine months, leaving $4.5 million under its $5.0 million authorization. Related-party payments included $3.8 million to Real Salt Lake and $2.1 million to Gig Economy Group during the nine-month period.
- Key risks include reliance on distributors and a limited set of products, international and foreign-exchange exposure, regulatory and direct-selling compliance, litigation, inventory obsolescence, third-party manufacturing and distribution, debt covenants, and implementation of new technology systems. A 10% strengthening of the U.S. dollar against relevant currencies would have reduced nine-month revenue by an estimated $4.0 million, or 2.7%.
- Management stated that disclosure controls were effective at March 31, 2018 and that no material change in internal control over financial reporting occurred during the quarter. The company expected Topic 606 adoption in fiscal 2019 to leave revenue timing materially unchanged.
Important facts for investors to verify
- Confirm the filing period: it covers fiscal 2018 Q3, not 2017 Q3.
- Track distributor and customer activity, regional trends, and the durability of quarterly revenue growth, particularly the ongoing weakness in Hong Kong.
- Assess the impact of the higher loan rate, revised covenants, debt repayment schedule, and the company’s capacity to maintain covenant compliance.
- Monitor the new class action, legal costs, and any developments that change the company’s loss-contingency assessment.
- Review whether the deferred-tax remeasurement and effective tax rate affect future reported earnings, and whether inventory obsolescence or related-party spending changes materially.