LifeVantage Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended September 30, 2015; unaudited. LifeVantage sells nutraceutical, skin-care, pet-health, and energy products through a direct-selling network in the Americas and Asia/Pacific.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $45.4 million | $51.6 million | Down 12.2% |
| Gross profit / gross margin | $38.4 million / 84.6% | $46.0 million / 89.0% | Margin down 4.4 percentage points |
| Operating income / margin | $2.7 million / 5.9% | $7.8 million / 15.0% | Operating income down 65.6% |
| Net income | $1.1 million | $4.7 million | Down 77.4% |
| Diluted EPS | $0.08 | $0.32 | Down $0.24 |
| Operating cash flow | $2.8 million | $5.1 million | Down $2.2 million |
Revenue fell across both regions: Americas revenue declined 4.7% to $34.7 million, while Asia/Pacific declined 30.0% to $10.6 million. Japan revenue decreased 29.5% to $8.6 million. Foreign exchange reduced revenue by $1.9 million, including an estimated $1.5 million impact from yen weakness.
Operating expenses were $35.7 million, down from $38.2 million, but rose to 78.7% of revenue from 74.0%. Commissions and incentives decreased to $22.0 million; SG&A was nearly unchanged at $13.7 million. The effective tax rate was 37.5%, versus 34.1%.
Balance sheet, cash flow, and debt
- Cash and cash equivalents were $13.7 million at September 30, 2015, down $0.2 million from June 30. Working capital was $2.9 million, down from $4.6 million.
- Operating cash flow of $2.8 million was offset by $3.1 million of term-loan principal payments and $0.003 million of capital expenditures; cash decreased by $0.2 million.
- Term-loan principal totaled $18.5 million: $11.7 million classified as current and $6.8 million long-term principal. The facility is secured, variable-rate debt; the reported average rate for the quarter was 8.75%.
- Total assets were $39.6 million and stockholders’ equity was $4.6 million. Management stated cash and expected operating cash flow should cover requirements for at least 12 months.
Material changes, outlook, and risks
- Management attributed weaker results to lower sales volume, particularly in Japan and other Asia/Pacific markets. Active preferred customers fell 9.5% year over year to 114,000; active distributors fell 5.9% to 64,000.
- Management cited a prior-year benefit of approximately $2.0 million from insurance recoveries related to recalled inventory, which reduced prior-year cost of sales. Current-period gross margin was also affected by costs associated with reworking previously recalled inventory.
- Management expects Americas revenue to increase through growth initiatives, revenue in Australia, Hong Kong, and the Philippines to remain broadly consistent with the current quarter, and Japan revenue to stabilize beginning in fiscal Q2 2016. Japan remains challenged by distributor departures and recruitment activity by former distributors; the company is pursuing legal action and efforts to unify its distributor base.
- The August 2015 credit-facility amendment lowered EBITDA covenant thresholds through June 2016 and requires accelerated payments of $0.5 million monthly beginning October 15, 2015, plus quarter-end cash above $12.5 million. The company was compliant at September 30, 2015, but said it likely would not meet EBITDA covenants for periods after June 30, 2016 without a significant EBITDA increase; it intends to seek further amendments. Failure to amend or meet covenants could trigger default and acceleration of debt.
- Management’s other risks include foreign-exchange exposure, distributor retention and regulatory compliance, product and supply-chain execution, and dependence on a limited number of products. A 10% strengthening of the U.S. dollar against relevant currencies was estimated to reduce quarterly revenue by 2.4%, or $1.1 million.
- After quarter-end, a 1-for-7 reverse stock split became effective October 19, 2015. The filing reports no legal proceedings in Part II, while describing ongoing legal action related to the Japan distributor dispute. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Japan sales and distributor activity stabilize as management expects, and whether currency movements further affect reported results.
- Whether the company meets future EBITDA, leverage, fixed-charge, and liquidity covenants or obtains additional lender amendments; review accelerated repayment requirements and debt maturities.
- Whether operating cash flow remains sufficient as revenue and working capital change, given reduced working capital and required debt payments.
- The sustainability of gross margin and earnings, including the effect of the prior-year insurance recovery and current inventory rework costs.
- Developments in the former-distributor dispute, product initiatives, and customer/distributor retention.