Lifevantage Corp annual report, FY2012

Business context and reporting period

LifeVantage Corporation’s Form 10-K covers the fiscal year ended June 30, 2012, filed September 10, 2012. Although the request identifies “2011 Q4,” this filing reports fiscal 2012 and includes fourth-quarter results for the quarter ended June 30, 2012, with fiscal 2011 comparisons. The company sells nutraceuticals and skin care products primarily through network marketing; Protandim is its flagship product. Markets included the United States, Japan, Mexico and Australia, with direct-to-consumer sales in Canada.

Financial performance and liquidity

Fourth-quarter FY2012 revenue was $44.60 million, gross profit $38.18 million and net income $4.83 million. In fourth-quarter FY2011, revenue was $15.04 million, gross profit $12.92 million and net loss $47.19 million.

• Revenue increased 224% year over year, attributed primarily to distributor and preferred-customer growth. FY2012 Americas revenue was $90.12 million and Asia/Pacific revenue $36.06 million; Japan contributed $35.45 million.
• Sales and marketing expense rose to $68.40 million from $21.06 million, mainly due to higher distributor commissions, events and headcount. General and administrative expense increased to $16.40 million from $7.52 million.
• Cash and cash equivalents were $24.65 million at year-end, versus $6.37 million a year earlier. Working capital improved to $22.80 million from a deficit of $3.11 million.
• Total liabilities were $16.24 million. The revolving credit line was repaid and closed; derivative liabilities were eliminated by year-end. Operating lease obligations totaled $2.88 million.
• The company repurchased 678,926 shares for $976,073. At June 30, 2012, 12.96 million warrants and 11.11 million options remained outstanding.

Material changes, outlook and risks

The company moved from a large FY2011 net loss to FY2012 profitability. The change reflected higher operating income and a $47.62 million reduction in other expense, primarily because derivative-liability fair-value expense fell as instruments were exercised or reclassified. FY2012 still included $6.74 million of derivative fair-value expense; the company reported no derivative liabilities at year-end and expected no related future income or expense.

Management expected revenue growth to continue in FY2013 as it recruited distributors and preferred customers and expanded internationally. It expected gross margin to remain near the current range and cash on hand to fund operations through June 30, 2013 and the foreseeable future. These are forward-looking statements, not guarantees.

• Business depends primarily on Protandim and on continued distributor recruitment, retention and productivity.
• Japan represented approximately 28% of FY2012 revenue. Japanese authorities restricted sale of the existing Protandim formulation containing Ashwagandha; an alternative formulation’s acceptance and commercial performance were uncertain.
• Dietary-supplement, advertising and network-marketing regulation creates exposure to enforcement, product or marketing restrictions, and distributor misconduct.
• The company relies on third-party manufacturers and suppliers, and faces product-liability, competitive, international, currency and growth-management risks. Past environmental liabilities related to former mining properties may also arise.
• Management and the auditor reported effective internal control over financial reporting at June 30, 2012. Management said prior material weaknesses had been remedied during FY2012.
• A peer-reviewed human study in withdrawing alcoholics did not produce the anticipated conditions needed to assess efficacy; it reported no adverse events at the elevated dosage studied.

Important facts for investors to verify

• Whether reported revenue growth is sustainable and supported by repeat consumer demand, not just distributor expansion.
• Japan’s regulatory treatment of Protandim, the availability of a compliant alternative formula, and the company’s geographic revenue concentration.
• The extent of product dependence and the scientific substantiation and regulatory compliance of company and distributor product claims.
• Potential dilution from outstanding warrants, options and future equity awards, relative to shares outstanding.
• Cash conversion and inventory needs: inventory increased to $11.35 million from $2.12 million, while FY2012 operating cash flow included a substantial inventory build.
• The terms and financial impact of the Tokyo office lease disclosed as a subsequent event; the filing states monthly rent of approximately $108,000 and a five-year term beginning August 1, 2012.