LifeVantage Corporation — Form 10-Q
Business context and reporting period. This filing covers the quarter and nine months ended March 31, 2016 (LifeVantage fiscal Q3 2016), with comparisons to the same 2015 periods. The company sells nutraceutical and skin-care products through an international direct-selling network. Its principal products include Protandim, TrueScience, Canine Health, Axio and PhysIQ. The filing period is March 31, 2016, notwithstanding the “2015 Q3” request metadata.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $56.2 million, up 24.4% from $45.2 million | $153.5 million, up 5.8% from $145.0 million |
| Gross profit / margin | $46.4 million / 82.7%; prior margin 83.3% | $129.0 million / 84.0%; prior margin 85.7% |
| Operating income | $3.6 million, versus $1.5 million | $9.3 million, versus $12.3 million |
| Net income | $1.0 million, versus $0.6 million; diluted EPS $0.07 versus $0.04 | $3.7 million, versus $6.8 million; diluted EPS $0.26 versus $0.47 |
| Operating cash flow | $6.2 million for nine months, down from $9.0 million |
Expenses and margins. Quarterly commissions and incentives rose to $28.2 million from $21.6 million, primarily with higher sales and promotional programs. SG&A was $14.6 million, approximately flat year over year. Nine-month gross margin declined partly because the prior-year period included about $2 million in product-recall settlement proceeds recorded as a reduction of cost of sales, as well as changes in product mix and new-product costs. Quarterly interest expense increased to $1.8 million from $0.7 million, including a $1.5 million write-off of unamortized costs from the refinanced facility.
Financial position and material changes
- At March 31, 2016, cash was $8.5 million, down from $13.9 million at June 30, 2015; working capital was $10.4 million, up from $4.6 million.
- Inventory increased to $17.0 million from $9.2 million. Operating cash flow was affected notably by a $7.7 million inventory increase.
- On March 30, the company repaid and terminated its prior credit facility and entered a new facility: a $10.0 million term loan at a fixed 4.93%, maturing March 30, 2019, plus a revolving facility of up to $2.0 million. The term loan is secured by substantially all company assets. Quarterly principal installments of $0.5 million begin in the quarter ending June 30, 2016.
- The company reported compliance with the new facility’s financial and other applicable covenants at March 31. Total principal debt was $10.0 million. Nine-month financing cash outflow was $11.3 million, including $21.6 million of term-loan repayments, partly offset by the new $10.0 million borrowing.
- Equity increased to $8.8 million from $3.3 million, including nine-month net income of $3.7 million. The company completed a one-for-seven reverse stock split in October 2015; presented share and per-share figures reflect the split.
Outlook, management commentary and risks
Management expects continued revenue growth in the Americas from product development and sales and marketing initiatives, including PhysIQ and TrueScience products. It says it is working to rebuild and strengthen Japan through distributor leadership alignment, local marketing tools, and product and program rollouts. Management expects commissions and incentives to remain consistent during the remainder of fiscal 2016 and SG&A to remain consistent, while continuing strategic investment. No specific revenue or earnings guidance is provided. Management stated that cash and expected operating cash flow should be sufficient for at least the next 12 months, while noting that additional financing may not be available on acceptable terms.
- Growth was concentrated in the Americas: quarterly Americas revenue rose 33.8%, while Asia/Pacific & Europe revenue was nearly flat; nine-month regional revenue fell 14.6%. Japan revenue declined 6.8% for the quarter and 16.9% for nine months.
- Foreign exchange reduced nine-month revenue by approximately $2.7 million overall; about 25.2% of nine-month revenue was generated outside the United States.
- The new credit facility imposes minimum working-capital and tangible-net-worth requirements, leverage and fixed-charge-coverage tests, and restrictions on additional debt, dividends, repurchases and certain transactions. Failure to comply could affect liquidity.
- Other disclosed risks include distributor retention and conduct, direct-selling and product regulation, product acceptance and supply-chain execution, dependence on a limited range of products and third-party manufacturers, litigation, and international, currency and cybersecurity risks. Management reported no material change to previously disclosed risk factors, no legal proceedings listed in Part II, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the strong quarterly U.S./Americas growth is sustainable, and whether Japan’s distributor and sales trends improve.
- Whether inventory growth, product mix and return reserves (about $0.3 million at March 31) lead to obsolescence, returns or working-capital pressure.
- Cash-flow generation and compliance with the new facility’s financial covenants as scheduled debt payments begin.
- The extent to which year-to-date earnings comparisons reflect prior-year recall settlement proceeds and current-period refinancing charges.
- Exposure to foreign exchange movements and the company’s ability to maintain distributor activity and acceptance of new products.