LifeVantage Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013; balance sheet compared with June 30, 2013. The company sells dietary supplements and skin-care products through independent distributors and preferred customers.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Year-over-year | Six months ended Dec. 31, 2013 | Year-over-year |
|---|---|---|---|---|
| Net sales | $51.5 million | Down 3.6% | $102.9 million | Down 3.2% |
| Gross margin | 84.6% | Up from 72.5% | 84.7% | Up from 78.8% |
| Operating income | $5.2 million | Up from $0.5 million | $10.2 million | Up from $7.3 million |
| Net income | $3.3 million | Up from $0.2 million | $6.5 million | Up from $4.4 million |
| Diluted EPS | $0.03 | Up from reported $0.00 | $0.06 | Up from $0.03 |
The margin comparison benefited from the prior-year quarter’s $5.9 million product-recall costs; no recall costs were recorded in the current periods. Six-month operating expenses were $76.9 million, broadly similar to $76.5 million a year earlier. Interest expense for the six months was $0.8 million, primarily related to the new term loan. The six-month effective tax rate was 34.0%.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $6.9 million, compared with $6.4 million in the prior-year period. Capital expenditures were $0.7 million, versus $3.9 million.
- Cash was $34.5 million at December 31, up from $26.3 million at June 30. Working capital was $30.9 million, compared with $25.4 million.
- The company reported $47 million of term-loan principal, including $4.7 million current and $42.3 million long-term before the unamortized discount. The facility bears variable interest; the reported rate for the period was 8.75%. A further $20 million delayed-draw facility was available but undrawn.
- The loan is secured by substantially all company assets and imposes financial and restrictive covenants. The company reported compliance at December 31 and said it expected to remain compliant in the ensuing year.
- Stockholders’ equity moved from $33.9 million at June 30 to a deficit of $0.5 million, principally following substantial share repurchases.
Changes, outlook and notable items
- Revenue declined despite Americas growth: Americas sales rose 7.2% for the quarter, while Asia/Pacific sales fell 19.7%. Japan revenue declined 29.9% for the quarter, reflecting lower sales volume and yen weakness. Foreign exchange reduced total revenue by $3.6 million in the quarter and $7.5 million over six months.
- Hong Kong market launch contributed $1.9 million of quarterly sales, partially offsetting the Asia/Pacific decline. Active distributors increased 25.5% year over year to 69,000; active preferred customers decreased 4.3% to 135,000.
- On November 1, the company completed a $40 million modified Dutch auction tender offer, repurchasing 16.3 million shares at $2.45 each. It also completed the full $5 million authorization under a separate repurchase program. Six-month cash used for share repurchases was $43.2 million; the term loan financed the tender offer.
- Management said cash, cash generation and available liquidity should meet requirements for at least 12 months. It expected operating expenses as a percentage of revenue to remain relatively consistent; sales and marketing and research and development expenses were expected to increase slightly in the remainder of fiscal 2014. No specific revenue or earnings guidance was provided.
- Management identified distributor growth and retention, new product development, and geographic expansion as priorities. Risks include currency volatility, dependence on distributors and key products, regulation of network marketing and products, and debt service and covenant constraints.
- A former distributor and related company filed counterclaims alleging defamation and tortious interference and seeking at least $20 million in damages. LifeVantage said it considered the claims without merit and intended to defend them. Management assessed the likelihood of an adverse outcome in pending litigation generally as remote.
Investor verification points
- Track Japan sales volumes and foreign-exchange effects, and assess whether Americas growth and Hong Kong sales offset ongoing weakness.
- Review debt amortization, variable-rate exposure, covenant headroom and the impact of the repurchases on the company’s equity and financial flexibility.
- Assess distributor and preferred-customer trends, product-return reserves of approximately $0.8 million, and recorded inventory obsolescence costs of $0.385 million.
- Monitor the $20 million counterclaim and any subsequent developments; the filing does not quantify a probable loss or reserve for it.
- Note that management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.