LifeVantage Corporation — Form 10-Q Summary
Period: Quarter ended September 30, 2016 (fiscal 2017 first quarter), compared with the quarter ended September 30, 2015. The filing metadata labels the request “2015 Q3,” but the filing itself reports 2016 Q3 results.
Business context
LifeVantage develops and sells nutraceutical supplements and skin-care products through independent distributors and customers in the Americas and Asia/Pacific & Europe. Its product lines include Protandim, TrueScience, Canine Health, Axio and PhysIQ. The company operates as one segment; revenue is reported by geographic region.
Financial results
| Metric | Three months ended September 30, 2016 | Prior-year period | Change |
|---|---|---|---|
| Revenue | $54.9 million | $45.4 million | +21.0% |
| Gross profit | $46.1 million | $38.4 million | +20.0% |
| Gross margin | 83.9% | 84.6% | Down 0.7 percentage points |
| Operating expenses | $44.1 million | $35.7 million | +23.4% |
| Operating income | $2.0 million | $2.7 million | Down 25.6% |
| Net income | $1.2 million | $1.1 million | +10.7% |
| Diluted earnings per share | $0.08 | $0.08 | No change |
| Operating cash flow | $2.9 million | $2.8 million | +$0.04 million |
Revenue growth reflected higher sales volume, new products and more active distributors, as well as a favorable $2.1 million foreign-exchange impact. Americas revenue rose 15.6% to $40.1 million; Asia/Pacific & Europe revenue rose 38.9% to $14.8 million, including a substantial favorable yen impact. Active distributors increased 6.3% to 68,000, while active preferred customers remained 114,000.
Commissions and incentives were $26.3 million, or 47.9% of revenue, versus $22.0 million, or 48.6%. Selling, general and administrative expense increased to $17.8 million from $13.7 million, primarily due to legal and accounting costs for the Audit Committee review, company events, staffing and stock compensation. Interest expense declined to $0.1 million from $0.7 million following the debt refinancing. The effective tax rate was 29.7%, versus 37.5%.
Financial position and liquidity
- Cash and cash equivalents were $10.2 million at September 30, 2016, up from $7.9 million at June 30, 2016. Working capital was $12.9 million, down from $13.9 million.
- Operating cash flow was $2.9 million; investing cash outflow was $0.1 million and financing cash outflow was $0.5 million, principally term-loan principal payments.
- Debt principal totaled $9.0 million: $2.0 million current and $7.0 million long-term. The March 2016 term loan bears fixed interest at 4.93%, matures in March 2019 and is secured by substantially all company assets. A $2.0 million revolving facility was available; the filing does not state that it was drawn.
- Management said cash and expected operating cash flow should be sufficient for at least 12 months. The credit facility includes financial and other restrictive covenants.
Outlook, risks and unusual items
- Management expected Americas revenue to increase through distributor tools, training, technology and product introductions, and forecast moderate growth in Asia/Pacific & Europe. It expected commissions and incentives to remain relatively stable as a percentage of sales and SG&A as a percentage of revenue to decrease slightly in the rest of fiscal 2017. No numerical revenue or earnings guidance was provided.
- The Audit Committee reviewed sales into countries where products were unregistered or direct selling was restricted. It identified insufficient international business controls and a material weakness in internal control over financial reporting. Management said the reviewed revenue was properly recognized, no related tax or other accruals were necessary, and no prior-period restatement was required. Remediation was underway, but completion timing was not estimable.
- The filing was delayed while the Audit Committee review continued. A lender granted an extension for delivery of the fiscal 2016 audited financial statements: delivery before December 31, 2016 would avoid default under the specified covenant.
- Legal matters include a former distributor’s unresolved defamation counterclaim seeking at least $20 million, a securities class action alleging misleading statements about controls and results, and consolidated shareholder derivative actions. The company recorded no accrual for these matters, citing that losses were not considered probable or estimable; adverse outcomes could be material.
- Management said approximately $3 million of quarterly revenue related to products that distributors may have carried or shipped into countries with registration or direct-selling restrictions, versus $2 million a year earlier, and expected such revenue to be significantly lower in future periods after restrictions and controls were introduced.
- Inventory obsolescence was $0.6 million for the quarter; the balance-sheet inventory reserve for obsolete and slow-moving goods was $0.9 million at quarter-end. A 10% strengthening of the U.S. dollar against relevant currencies would have reduced quarterly revenue by an estimated $1.5 million.
Important facts for investors to verify
- Progress and testing of remediation for the material weakness, and whether international sales controls are effective.
- Timely filing of audited fiscal 2016 financial statements and continued compliance with lender covenants.
- Developments and potential exposure in the securities, derivative and former-distributor litigation.
- How much reported growth reflects underlying demand versus favorable foreign exchange, and whether distributor/customer trends persist.
- Inventory quality, product-mix effects on gross margin, and the level of future legal, accounting and compliance costs.