Business context and reporting period
LifeVantage Corporation’s Form 10-Q covers the quarter ended December 31, 2018 (fiscal 2019 second quarter), with year-to-date results for the six months then ended. The company sells nutraceutical, personal-care and related products through a direct-sales network across the Americas and Asia/Pacific & Europe.
Key financial metrics
Dollar amounts below are in millions, except per-share data. Comparisons are with the prior-year comparable period.
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $58.2 vs. $49.5; up 17.6% | $113.8 vs. $98.6; up 15.4% |
| Gross profit / margin | $48.4 / 83.2%, vs. $40.4 / 81.6% | $94.8 / 83.3%, vs. $80.8 / 81.9% |
| Operating income | $0.6 vs. $2.3 | $1.9 vs. $3.7 |
| Net income / diluted EPS | $0.8 / $0.06 vs. $0.3 / $0.02 | $1.7 / $0.12 vs. $1.1 / $0.08 |
| Operating cash flow | Not separately reported | $6.9 vs. $4.7 |
For the quarter, commissions and incentives were $28.2 million (48.4% of revenue), while selling, general and administrative expense was $19.6 million. For the six months, those expenses were $56.0 million (49.2% of revenue) and $36.9 million, respectively. The gross-margin improvement was attributed primarily to a price increase and product mix; higher commissions and event-related and compensation costs weighed on operating income.
At December 31, cash and cash equivalents were $19.0 million; working capital was $14.9 million. Total debt principal was $4.5 million ($2.0 million current and $2.5 million long-term). The company reported compliance with credit-facility covenants. Six-month investing cash outflow was $2.3 million, including a $2.0 million convertible note investment; financing cash outflow was $2.3 million, including $1.5 million of share repurchases and $1.0 million of term-loan payments.
Material changes and management commentary
- Revenue grew in both regions: Americas revenue rose 15.0% for the quarter and Asia/Pacific & Europe rose 25.0%. Growth in the latter region reflected expansion in Taiwan, Europe and Australia; Japan revenue declined 3.4% for the quarter, primarily with lower active-member counts.
- Active customers increased 9.3% year over year to 118,000, and active independent distributors increased 6.5% to 66,000. Management cited its red-carpet program, product launches, international expansion and distributor initiatives as growth drivers.
- Net income comparisons benefited from tax effects: the quarter included a $0.4 million tax benefit versus $1.7 million of tax expense a year earlier. The six-month effective tax rate was negative 10.5%, versus 65.8% in the prior-year period. Management expects the effective rate to increase for the remainder of fiscal 2019, while noting that tax outcomes can fluctuate.
- Management expects commissions and incentives to decrease slightly as a percentage of revenue and SG&A to decline as a percentage of revenue during the remainder of fiscal 2019. These are qualitative expectations; the filing provides no numerical revenue or earnings guidance.
- The company discontinued its loyalty-points program as of December 31, 2018 and recognized approximately $0.5 million of previously deferred revenue. Adoption of the new revenue standard otherwise had an immaterial opening-equity effect.
- Subsequent to quarter-end, on February 1, 2019, the company paid $2.0 million on its term loan and amended its facility, increasing the revolving commitment from $2.0 million to $5.0 million and easing certain working-capital and fixed-charge-coverage requirements. The board also increased the share-repurchase authorization from $5 million to $15 million.
Outlook, risks and contingencies
Management said cash, operating cash flow and available resources should meet requirements for at least the next 12 months. Key risks include distributor recruitment and retention, product and market execution, dependence on third-party manufacturers and a limited product base, foreign exchange exposure, regulatory scrutiny of direct selling and products, and debt covenants. A 10% strengthening of the U.S. dollar against relevant currencies would have reduced six-month revenue by an estimated 2.8%, or $3.2 million.
A putative class action, Smith v. LifeVantage Corp., alleges, among other claims, anticompetitive conduct related to product patents. The company is seeking dismissal, intends to defend the case, and recorded no accrual because it considers a loss neither probable nor estimable; an adverse outcome could materially affect results or financial condition. No other probable loss contingencies requiring accrual were reported. The company also disclosed a $2.0 million convertible note to Gig Economy Group, bearing 8% interest and maturing May 31, 2019; a former director was a majority owner and officer of that company.
The company expects adoption of the new lease standard to materially increase balance-sheet assets and liabilities, but does not expect a material effect on earnings or cash flows. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether revenue growth and rising active-member counts continue, particularly in newer markets, and whether Japan stabilizes.
- Whether higher incentive, event and compensation expenses moderate as management expects, and whether operating profitability recovers.
- The sustainability of reported net income given the unusual tax benefit and the expected higher tax rate.
- The outcome of the class action and repayment or conversion of the related-party convertible note by its stated maturity.
- Post-quarter debt balances, actual revolver availability and covenant headroom after the February 2019 amendment and payment.
- Execution and funding of the enlarged share-repurchase authorization, alongside operating and contractual cash needs.