Business context and reporting period
LifeVantage Corporation sells nutraceutical supplements and skin-care products through independent distributors and customers in the Americas and Asia/Pacific & Europe. This unaudited Form 10-Q covers the three months ended September 30, 2017 (fiscal 2018 first quarter); comparisons are with the three months ended September 30, 2016.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $49.1 million | $54.9 million |
| Gross profit / margin | $40.4 million / 82.2% | $46.1 million / 83.9% |
| Operating income | $1.4 million | $2.0 million |
| Net income | $0.8 million | $1.2 million |
| Diluted EPS | $0.06 | $0.08 |
| Operating cash flow | $2.5 million | $2.9 million |
- Revenue declined 10.5%; net income declined 30.8%. Gross margin decreased 1.7 percentage points.
- Operating expenses were $39.0 million, or 79.4% of revenue, versus $44.1 million, or 80.3%. SG&A declined to $15.6 million from $17.8 million; commissions and incentives were $23.4 million versus $26.3 million.
- Cash and cash equivalents were $12.3 million at quarter-end, up $0.8 million from June 30, 2017. Working capital was $11.9 million, compared with $12.2 million.
- Investing cash outflow was $1.2 million, primarily for technology assets and fixed assets; financing cash outflow was $0.5 million for scheduled term-loan principal payments.
- Debt principal totaled $7.0 million: $2.0 million current and $5.0 million long-term. The term loan bears fixed interest at 4.93% and matures March 30, 2019. The company reported compliance with credit-facility covenants.
Material changes versus the prior comparable period
- Management attributed revenue weakness principally to policies adopted after an audit committee independent review, aimed at preventing sales into countries without required customs, tax and regulatory compliance and verifying distributor residency. Active preferred customers fell 4.4% year over year to 109,000; active distributors fell 7.4% to 63,000.
- Americas revenue declined 9.9%, including a 11.7% decline in the United States. Asia/Pacific & Europe revenue declined 12.2%; Hong Kong revenue fell 90.6%, while Japan revenue increased 2.3% reported and 10.9% on a constant-currency basis.
- Foreign exchange reduced total revenue by $0.7 million; the Asia/Pacific & Europe region was negatively affected by approximately $0.8 million. Cost of sales as a share of revenue rose, primarily due to product and geographic sales mix.
- SG&A decreased mainly because of lower legal and accounting costs following completion of the audit committee review, along with lower stock compensation, employee costs and bank fees.
Outlook, risks, contingencies and unusual items
- Management said cash and expected operating cash flow should cover requirements for at least the next 12 months and anticipated compliance with financial covenants during the coming year. It expected commissions and incentives to remain relatively stable as a percentage of sales, with fluctuations, and SG&A as a percentage of revenue to remain relatively consistent. No numerical revenue or earnings guidance was provided.
- The company launched operations in Germany, held distributor events in the U.S., Canada and Japan, and said it expected to enter China in the near term through an e-commerce model. It cited investments in distributor tools, technology and product development.
- The securities class action was dismissed with prejudice on September 18, 2017; the parties later agreed to mutual releases, with no payment by defendants, and no appeal. Shareholder derivative actions remained stayed. The company recorded no loss-contingency accrual, stating liability was not probable or estimable; an unfavorable resolution could have a material adverse effect.
- Related-party transactions included $1.0 million paid to Real Salt Lake, whose owner was a major company stockholder, and $0.9 million for software services from Gig Economy Group, majority-owned by a company director. The company also expected to pay approximately $3.0 million to Real Salt Lake during fiscal 2018.
- Key risks include continued distributor and customer declines, dependence on direct selling and a limited product portfolio, regulatory and legal exposure, international and currency risks, and debt covenants. A 10% strengthening of the U.S. dollar against relevant currencies was estimated to reduce quarterly revenue by 2.8%, or $1.3 million.
Important facts for investors to verify
- Whether distributor-residency and market-compliance policies continue to affect customer counts and revenue, particularly in the U.S. and Hong Kong.
- Whether Japan’s constant-currency growth and the Germany launch translate into sustained sales and whether the planned China e-commerce entry proceeds.
- Cash generation, inventory quality and obsolescence reserves, capital spending, and continued compliance with credit-facility covenants.
- Developments in the stayed derivative litigation and the financial exposure, if any, from indemnification obligations.
- The execution and governance of the disclosed related-party sponsorship and software-services arrangements.