LifeVantage Corporation — Q2 FY2013 Form 10-Q
Business context and period: Unaudited results cover the quarter and six months ended December 31, 2012, compared with the same periods in 2011. LifeVantage sells nutraceutical and skin-care products primarily through independent distributors. Protandim is its flagship product; sales grew substantially in the Americas and Asia/Pacific.
Key financial results
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $53.4 million | $25.3 million | $106.3 million | $45.4 million |
| Gross profit | $38.8 million | $21.6 million | $83.8 million | $38.7 million |
| Gross margin | 73% | 85% | 79% | 85% |
| Operating income | $0.5 million | $4.3 million | $7.3 million | $7.7 million |
| Net income | $0.2 million | $8.8 million | $4.4 million | $12.5 million |
| Diluted earnings per share | $0.00 | $0.05 | $0.03 | $0.07 |
Cash flow and liquidity: For the six months, operating cash flow was $6.4 million, investing cash outflow $3.9 million, and financing cash inflow $1.3 million. Cash increased $3.8 million to $28.5 million. Working capital was $25.6 million, up from $22.8 million at June 30, 2012. Current assets were $44.3 million and current liabilities $18.7 million. The balance sheet presents no separate borrowings line; it reports $1.1 million of other long-term liabilities.
Changes and drivers
- Sales increased 111% in the quarter and 134% for the six-month period. Management attributed growth to higher distributor-channel volume in both regions; six-month Americas sales were $64.4 million and Asia/Pacific sales $41.9 million.
- Margins declined, principally due to $5.9 million of costs recorded for the Protandim recall. Inventory was written down by $3.7 million, primarily in connection with the recall.
- Operating expenses rose to $38.3 million for the quarter and $76.5 million for six months, mainly from higher distributor commissions, staffing, facilities, and growth-related professional costs.
- Quarterly and six-month 2011 results included non-cash gains from changes in derivative fair value of $3.1 million and $3.9 million, respectively; no such gain was recorded in 2012. The 2012 six-month period also included $3.0 million of income tax expense, compared with an $0.8 million tax benefit in 2011.
- Shares outstanding increased, including through option and warrant exercises. The company repurchased approximately 116,000 shares under a newly announced $5 million authorization.
Outlook, risks, and unusual items
- Management said existing cash and expected future cash flow should fund operations for at least the next 12 months, while warning that weaker-than-projected sales could require expense reductions or additional financing, potentially diluting shareholders.
- Management expected operating expenses to continue increasing as sales grow and said it had cash available for R&D spending of up to approximately 2% of net revenue for the remainder of the fiscal year; project timing would determine actual expense recognition. No specific revenue or earnings forecast was provided.
- The voluntary recall involved certain Protandim lots after small metal fragments were found in batches of supplier-provided turmeric extract. Recorded recall costs were $5.9 million, including approximately $1.8 million accrued for estimated future replacements; estimated maximum exposure was approximately $7.3 million. Potential insurance or third-party recoveries were not included, and the company had no product recall insurance.
- Effective January 1, 2013, Japan operations transitioned from a “not-for-resale” model to direct selling; a revised Protandim formulation for Japan was announced in January. Management highlighted regulatory, distributor-acceptance, currency, and transition risks in that market.
- Other material risks include reliance on Protandim and third-party manufacturers and suppliers, product quality and recall exposure, distributor conduct and retention, foreign-exchange movements, and regulatory scrutiny of direct selling. The company reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Recall progress, final costs, product-replacement obligations, and any recoveries or liability claims.
- Whether the Japan sales-model transition and revised Protandim formulation sustain sales and meet regulatory requirements.
- Whether rapid sales growth converts into stronger operating income and cash generation after commissions and expansion costs.
- Cash deployment, including the remaining share-repurchase authorization, capital spending, and potential dilution from equity awards and warrants.
- Supplier quality controls and the ability of contract manufacturers to implement additional contamination checks.