LifeVantage Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020 (the company’s fiscal 2021 first quarter; the filing is sometimes labeled “2020 Q1” in request metadata). Comparisons are with the three months ended September 30, 2019, unless otherwise noted. Amounts below are in U.S. dollars.
Business context and key financial results
LifeVantage sells nutrigenomic supplements, personal-care and other wellness products through customers and an international independent-distributor network. It reports one operating segment, with revenue split between the Americas and Asia/Pacific & Europe.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net revenue | $54.8 million | $56.2 million | Down 2.5% |
| Gross profit / margin | $45.4 million / 82.9% | $47.0 million / 83.7% | Margin down 0.8 percentage points |
| Operating income | $3.5 million | $2.6 million | Up 35.7% |
| Net income | $2.5 million | $1.8 million | Up 39.2% |
| Diluted earnings per share | $0.17 | $0.12 | Up $0.05 |
| Cash used in operating activities | $1.1 million | $3.5 million | Use decreased by $2.4 million |
| Cash and cash equivalents at period end | $18.0 million | $13.0 million | Prior-year period-end balance |
Commissions and incentives were $25.6 million (46.8% of revenue), versus $26.8 million (47.6%). SG&A was $16.3 million (29.7% of revenue), versus $17.7 million (31.5%). Interest expense was $6,000, down from $48,000; total other expense was $147,000, compared with $128,000. The effective tax rate was 26.8%, versus 28.1%.
Liquidity, balance sheet and capital resources
- Cash declined $4.2 million from June 30, 2020. Operating cash use was $1.1 million; investing cash use was $1.0 million, primarily equipment purchases; financing cash use was $2.2 million, mainly share repurchases and tax-withholding share cancellations.
- Working capital was $19.0 million at September 30, compared with $18.8 million at June 30. Management stated cash and expected operating cash flows should meet requirements for at least the next 12 months.
- The company reported no term-loan balance after repaying the remaining term loan in fiscal 2020. Its amended credit facility provides a revolving facility of up to $5.0 million; the filing does not state that any amount was drawn. It was in compliance with financial and other applicable covenants at quarter-end.
- Lease liabilities totaled $15.5 million, including $2.3 million current and $13.2 million long-term. Contractual obligations also included $19.5 million of other operating commitments, primarily marketing, sponsorship and inventory purchases.
- The board expanded the share-repurchase authorization to $35.0 million and extended it through November 30, 2023. The company repurchased 136,008 shares for $2.0 million during the quarter; $21.4 million remained authorized at September 30.
Material changes and management commentary
- Revenue declined in the Americas by 3.7%, to $38.7 million; Asia/Pacific & Europe revenue rose 0.7%, to $16.2 million. U.S. revenue fell 3.3% and Japan revenue fell 5.7% (6.5% on a constant-currency basis). Australia and New Zealand revenue increased 30.5%.
- Management attributed lower revenue mainly to the absence of large events held in the prior-year period and a 5.0% decrease in active accounts. Product launches, price changes and free-shipping programs supported average order size. Foreign exchange positively affected total revenue by approximately $0.2 million.
- Active independent distributors increased 4.6% to 68,000, while active customers declined 10.3% to 104,000. Total active accounts decreased 5.0% to 172,000.
- Gross margin was pressured by higher shipping costs, reduced event-related fee revenue and changes in geographic and product mix. Lower event costs and stock-based compensation helped reduce SG&A, partly offset by higher legal, technology depreciation, executive-transition and office-related costs.
- Operating cash use improved year over year, but cash from operations remained negative. The quarter included a $5.2 million cash outflow from other accrued expenses.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified revenue or earnings guidance. For the rest of fiscal 2021, management expected commissions and SG&A as a percentage of revenue to fluctuate as it adapts spending, programs, training and events to business conditions.
- COVID-19 had led to remote work, showroom and will-call closures in some markets, and canceled events. Management cited potential continuing effects on distributor recruitment, supply, delivery, customer purchasing and operations. In Japan, an in-person hard-copy enrollment requirement constrained virtual prospecting.
- The company abandoned its Sandy, Utah corporate-office right-of-use asset and related leasehold assets, reducing them to zero salvage value. The filing reports $0.8 million of abandonment expense; the remaining lease liability was $0.5 million. A new corporate office was expected to open in early 2021.
- A putative class action, Smith v. LifeVantage Corp., remained pending. The company had not accrued a loss because it considered liability not probable or estimable, and stated an unfavorable outcome could materially affect the business. Management disclosed no other probable loss contingencies requiring accrual.
- Other notable risks include foreign-exchange exposure (34% of quarterly revenue was outside the U.S.; a 10% strengthening of the U.S. dollar was estimated to reduce quarterly revenue by $1.7 million), distributor retention and compliance, product and supply-chain dependence, and credit-facility covenants. The $2.2 million investment in Gig Economy Group was unchanged, with no impairment recognized; the filing notes GEG’s early-stage financing and valuation risks.
Important facts for investors to verify
- Whether the decline in active customers and total accounts continues, and whether distributor growth and larger average orders can offset it.
- How COVID-19, especially Japan’s enrollment constraints, affects sales, events, supply and customer retention in subsequent quarters.
- Whether operating cash flow turns positive and cash remains adequate after repurchases, capital spending and contractual obligations.
- Progress on the new corporate office, the related lease commitments and any further restructuring or impairment charges.
- Developments in the class action, credit-facility covenant compliance and the recoverability or valuation of the GEG investment.