LifeVantage Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. The filing also reports fourth-quarter results; the filing is for FY2015, not a standalone FY2014 Q4 report.
Business context
LifeVantage sells dietary supplements, skin-care products, pet supplements and energy-drink mixes through independent distributors and preferred customers in the United States, Japan and other international markets. Protandim remained the largest product, contributing 63.6% of FY2015 revenue. The company introduced Axio energy drink mixes in October 2014.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $190.3 million | $214.0 million |
| Gross profit / margin | $162.3 million / 85.3% | $180.8 million / 84.5% |
| Operating income / margin | $13.9 million / 7.4% | $19.4 million / 9.1% |
| Net income / diluted EPS | $7.0 million / $0.07 | $11.4 million / $0.10 |
| Operating cash flow | $13.2 million | $12.1 million |
| Cash and cash equivalents at year-end | $13.9 million | $20.4 million |
| Working capital at year-end | $4.6 million | $17.3 million |
FY2015 investing cash outflow was $1.2 million, mainly capital expenditures; financing cash outflow was $18.5 million, including $9.2 million of loan principal payments and $9.9 million of share repurchases. Year-end loan principal was approximately $21.6 million, with $11.1 million due within one year. The credit facility is secured by substantially all company assets. Total liabilities were $37.6 million and stockholders’ equity was $3.3 million.
Changes versus prior period
- Revenue fell $23.6 million, or about 11%, year over year. Asia/Pacific revenue declined 28.2%; Japan revenue fell 33.0% in U.S. dollars, reflecting distributor disruption and currency weakness. The yen reduced FY2015 revenue by approximately $5.3 million in Japan; foreign exchange reduced total revenue by about $6.0 million.
- Americas revenue decreased 2.2%, partly associated with fewer active preferred customers and lower sales volume. Active distributors declined 4.4% to approximately 65,000; active preferred customers declined 10.2% to approximately 115,000.
- Net income declined 38.6%. Operating expenses decreased in dollars with lower sales, but increased to 77.9% of revenue from 75.4%, including higher executive compensation and marketing-event costs.
- Gross margin improved to 85.3%, partly due to approximately $2.0 million of insurance cost recoveries in the first quarter. The company reported no FY2015 product-recall costs; FY2013 included $4.8 million.
- Protandim revenue declined to $121.0 million from $142.9 million; TrueScience skin-care revenue declined to $38.3 million from $46.5 million. Other product revenue rose to $31.1 million from $24.6 million.
- Fourth-quarter revenue was $45.3 million versus $56.0 million a year earlier; net income was $0.2 million versus $2.4 million.
Outlook, risks and unusual items
- Management expected moderate revenue growth, cited plans to strengthen sales and marketing, innovate products and expand geographically, and expected gross margin of approximately 84%–85%. It also acknowledged ongoing challenges in Japan and uncertainty about the impact of distributor losses and recruiting activity by former leaders.
- The company was not compliant with an earlier EBITDA covenant in March 2015 and amended the facility. A further amendment dated August 27, 2015 lowered required EBITDA thresholds through June 2016, but requires additional monthly principal payments of $0.5 million beginning October 2015 and quarterly payments of unrestricted cash above $12.5 million. Management anticipated difficulty meeting later EBITDA covenants without significant improvement and said further lender negotiations might be needed.
- Management stated that cash and operating cash flows should cover requirements for at least 12 months, while noting that financing alternatives may not be available on acceptable terms. At June 30, 2015, the company reported compliance with applicable amended covenants.
- Executive leadership changed substantially: Darren Jensen became CEO in May 2015; additional finance and sales leadership changes followed in July and August. The filing identifies integration and execution risks.
- Two significant disputed legal matters are described: a distributor’s suit seeking more than $20 million and a company suit involving counterclaims seeking at least $20 million. Management considers the claims against the company without merit; the filing does not state a clear quantified accrual for these matters.
- Nasdaq notified the company in April 2015 that its share price did not meet the $1 minimum bid requirement; the initial cure period ran through September 28, 2015. Other key risks include dependence on Protandim, direct-selling and product-claim regulation, product liability and recalls, foreign exchange, distributor retention, and covenant restrictions.
- The company repurchased approximately 7.6 million shares for $9.9 million during FY2015. It paid no dividends and said it did not expect to do so in the foreseeable future.
Important facts for investors to verify
- Whether revenue, distributor activity and customer counts stabilize, particularly in Japan, and whether new products offset Protandim and skin-care declines.
- Whether the company meets amended EBITDA, leverage, fixed-charge and minimum-cash requirements, and the effect of accelerated debt repayments on liquidity.
- Whether the stated moderate-growth outlook and 84%–85% gross-margin expectation are achieved, including whether FY2015 insurance recoveries recur.
- Developments in the pending lawsuits, Nasdaq listing compliance, and the transition to the new management team.
- The filing reports audited financial statements and effective internal control over financial reporting as of June 30, 2015.