LifeVantage Corporation — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended September 30, 2019, compared with the three months ended September 30, 2018. Amounts are in U.S. dollars; financial statement figures are in thousands unless stated otherwise. LifeVantage sells nutraceutical, skincare, haircare and related products primarily through independent distributors and customers.
Financial performance and position
- Revenue: $56.2 million, up 1.1% from $55.6 million. Foreign exchange positively affected revenue by $0.2 million.
- Gross profit and margin: $47.0 million; margin was 83.7%, compared with 83.5%. Management attributed the margin improvement primarily to lower inventory obsolescence and handling costs and changes in sales mix.
- Operating income: $2.6 million, compared with $1.3 million. Operating expenses declined to $44.5 million from $45.1 million.
- Net income and EPS: Net income was $1.8 million versus $0.9 million. Diluted EPS was $0.12 versus $0.06; basic EPS was $0.13 versus $0.07.
- Operating expenses: Commissions and incentives were $26.8 million, or 47.6% of revenue, versus $27.8 million, or 50.0%. SG&A was $17.7 million, or 31.5% of revenue, versus $17.3 million, or 31.1%.
- Taxes and interest: Income tax expense was $0.7 million and the effective tax rate was 28.1%, versus $0.3 million and 21.8%. Net interest expense was $48,000, versus $110,000.
- Cash flow: Operating activities used $3.5 million, compared with $2.4 million provided in the prior-year quarter. Investing activities used $0.8 million, primarily for equipment; financing activities used $1.6 million, including $1.4 million of stock repurchases and a $0.5 million term-loan payment. Cash declined $5.8 million to $13.0 million.
- Liquidity and balance sheet: Working capital was $17.1 million, versus $17.0 million at June 30, 2019. Total assets were $56.0 million and stockholders’ equity was $29.6 million. Long-term debt was $1.0 million, all classified as current; the company said it expects to repay the remaining term-loan balance in fiscal 2020. The $5.0 million revolving facility is available under the credit agreement; the filing does not clearly state an outstanding revolver balance.
Material changes and operating trends
- Asia/Pacific & Europe revenue increased 10.4% to $16.0 million, led by Japan (+10.0%) and Australia (+68.8%); Greater China revenue fell 35.5%. Americas revenue declined 2.2% to $40.2 million, with U.S. revenue down 2.6%.
- Active accounts fell 2.2% to 181,000: active distributors declined 1.5% to 65,000 and active customers declined 2.5% to 116,000. Americas accounts decreased 4.2%, while Asia/Pacific & Europe accounts increased 4.7%.
- The company adopted lease accounting (ASC 842) on July 1, 2019, recognizing $3.3 million in right-of-use assets and $3.9 million in lease liabilities at adoption. It recorded a $0.5 million beginning-equity adjustment related to an updated lease term. At September 30, lease liabilities totaled $3.2 million.
- The company repurchased 111,065 shares for $1.4 million during the quarter; $7.5 million remained authorized under the $15 million program at September 30.
Outlook, risks and contingencies
- Management said cash, cash flows from operations and available liquidity are expected to meet requirements for at least the next 12 months. It also noted the possibility of additional funding or reductions to capital spending and expenses if cash resources prove insufficient. The company was in compliance with its financial and other credit-facility covenants and anticipated continued compliance.
- Fiscal 2020 initiatives include strengthening subscriptions, investing in the red-carpet program, expanding internationally, enhancing distributor compensation and training, and launching Protandim NAD Synergizer. A full New Zealand launch was scheduled for November 2019. Management expected SG&A as a percentage of revenue to decline during the rest of the fiscal year, with period-to-period variation; commissions and incentives as a percentage of revenue could fluctuate.
- Management expected the effective tax rate to decrease during the remainder of fiscal 2020 due to anticipated favorable discrete items, while cautioning that tax rates may vary with tax differences and stock-price movements.
- The company faces foreign-exchange exposure: about 34% of quarterly revenue came from outside the United States. Management estimated that a 10% strengthening of the U.S. dollar against relevant currencies would have reduced quarterly revenue by $1.7 million, or 3.0%.
- A purported class action, Smith v. LifeVantage Corp., alleges antitrust and other claims. The company has not accrued a loss because it considers liability not probable or estimable and intends to defend the case; it warns an unfavorable outcome could materially affect results or financial condition. Management disclosed no other probable loss contingencies requiring accrual or disclosure.
- Other stated risks include distributor retention and productivity, product acceptance and launch execution, reliance on key products and third-party manufacturers, regulatory and direct-selling compliance, litigation, cybersecurity and systems, foreign exchange, and compliance with debt covenants. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Determine whether the decline in active Americas distributors and customers persists, and whether Asia-Pacific growth can offset it.
- Track operating cash flow and the drivers of the quarter’s working-capital outflow, particularly prepaid expenses, accrued expenses and inventory.
- Verify progress and commercial contribution from the NAD Synergizer launch and New Zealand rollout, as well as the stated SG&A and tax-rate outlook.
- Monitor cash levels, term-loan repayment, covenant compliance and remaining share-repurchase authorization.
- Follow developments in the Smith litigation and the company’s foreign-exchange exposure, particularly to the Japanese yen.