Lifevantage Corporation

Gentlemen, thank you for standing by. Welcome to today's conference call to discuss LifeVantage's third fiscal quarter of 2021 financial results. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up. Hosting today's conference will be Reed Anderson with ICR. As a reminder, today's conference is being recorded. And now, I would like to turn the conference over to Mr. Anderson. Please go ahead, sir.

Thank you. Good afternoon and welcome to LifeVantage Corporation's conference call to discuss results for the third fiscal quarter of 2021. On the call today from LifeVantage with prepared remarks are Steve Fife, Chief Executive Officer and Chief Financial Officer, and Justin Rose, Chief Sales and Marketing Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you have not received the release, it is available on the investor relations portion of LifeVantage's website at www.lifevantage.com. This call is being webcast and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factor section of LifeVantage's most recently filed forms 10-K and 10-Q. Please note that during today's call we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into LifeVantage's ongoing results of operations, particularly when comparing underlying operating results from period to period. We've included a reconciliation of these non-GAAP measures with today's release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast April 29th, 2021. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call. Now I will turn the call over to Steve Fife, the Chief Executive Officer and Chief Financial Officer of LifeVantage.

Thanks, Reid, and good afternoon, everyone. Thank you for joining us today. With me today is Justin Rose, our Chief Sales and Marketing Officer, who will join me with prepared remarks before we turn the call over for Q&A. We generated third quarter adjusted earnings per share of 20 cents, which is up 54% compared to the prior year period, but down sequentially 20% despite a challenging environment that resulted in an 8% decline in revenue year over year. The delayed timing of new product launches and country launches, both due to COVID-19, had an adverse impact on revenue in the quarter. However, from a trend perspective, March was the strongest month in the quarter, and we feel good about our positioning and ability to return to top-line growth over the near term. In addition, the lack of in-person interaction due to COVID-19 has been a major factor adversely affecting our performance over the past year. While it's still very early and we don't anticipate a return to old practices anytime soon, We are seeing a positive impact to our business as people are becoming more comfortable with in-person meetings, even under controlled conditions. The uptick in growth from February to March has continued into April, and as mentioned, we feel good about our positioning and ability to return to top-line growth. This growth is being driven by engagement, excitement, and alignment between corporate and our top distributor leaders. The excitement within the distributor base is a result of a renewed and intentional focus on a simplified message centered on our flagship product, Protandim NRF2 Synergizer. Protandim NRF2 is the result of a discovery made over 50 years ago at Duke University. It is a combination of five natural ingredients that stimulate the body's natural production of two key antioxidant enzymes and restores those enzymes to levels of a 15-year-old, resulting in a reduction in oxidative stress by an average of 40% in 30 days. Procandum NRF2 has been featured in the media, was the subject of an ABC primetime investigative report, and its benefits have been validated by over 25 independent studies from prestigious universities and institutions from around the world. These studies can easily be found and reviewed on PubMed.gov. This story is a message that is enthusiastically embraced by our entire distributor base. While the corporate staff is excited to move into our new headquarters, our distributor leaders are equally excited to use the office and our training facilities as part of their enrollment process. Although we have yet to have an official grand opening, distributors from as far as Mexico and throughout the United States have traveled to visit the new office despite the inconveniences of pandemic travel. With dedicated space for training, education, and recruitment, distributors have already begun booking the facility for weekend trainings with 50-plus guests to use as a backdrop during their recruitment process. We recognize that the change to the C-suite in September and the lack of a permanent CEO created a sense of confusion and instability with the top distributor leaders. As the new CEO, over the past several months, I have taken the opportunity to meet with and listen to each of these distributor leaders. The level of engagement by our top producers intensified as the quarter progressed, including a re-energized focus around the strength of our core offerings, as well as newly launched products. We believe we've been able to increase our alignment significantly and are clearly in a better position than we were a few quarters ago across the entire organization, with everyone rowing in the same direction. The tools we've rolled out over the past several months are gaining traction as the field gets more comfortable with these solutions and has higher rates of success. Justin will provide some additional details around this. With this renewed alignment between corporate and distributor leadership, going forward we will have two primary areas of focus. First, increasing our distributor enrollments, and second, increasing the month two purchases of both distributors and customers. I will share updates on the successes of these initiatives in future quarters. Before I turn to a discussion on third quarter results, let me turn the call over to Justin Rose, our Chief Sales and Marketing Officer, to discuss our recent activities.

Thank you, Steve. It is a pleasure to speak with everyone today. While we're not satisfied with our third quarter results, there were several positives that should set us up for improving trends over the next several months, including the continual refocus and alignment with our existing distributor leadership group. In March, we launched our new daily wellness product, and it was well received by our distributors and customers. This product is uniquely formulated to provide daily support to keep the immune system healthy and strong. We had originally planned to launch Daily Wellness in early February, but encountered unexpected supply chain issues related to raw material shortages stemming from COVID-19, which also impacted the initial quantities we had available for sale. We sold out of our initial quantities within the first few hours of launch and expect sales to continue building as consumer acceptance grows. Another encouraging sign was the Virtual Elite Academy held in March. In total, there were several thousand people who participated both virtually and in group gatherings, which is the first since the pandemic began. The training and initiatives were well received, and we already have over 2,000 people signed up for the next Elite Academy event in July, which will be focused on a continual push of our sales process, which we call the ITT system. This will also include some new tools and activities designed to help increase enrollment and retention. We will also be introducing a new package and building strategy that is designed to better meet the needs of our future distributors and customers. Excitement is building in the field for highly anticipated CBD enhanced NRF2 personal care line that we plan to launch June 1st, 2021. This product launch will be an introduction to the multi-billion dollar body care category with four products, body lotion, body butter, body wash, and a natural deodorant. In addition, the launch will include two products, body rub and soothing balm, to a category that we are referring to as targeted relief. And finally, we are also introducing a luxurious facial oil to our TrueScience skincare line that we are calling Beauty Serum. Each product is formulated to elevate everyday routines with NRF2 active ingredients and combats visible signs of aging, caused by oxidative stress. Building on the current trend of CBD-based topical products, we are excited about our ongoing clinical studies currently in process that are showing the synergistic and complementary nature of broad spectrum CBD with NRF2 ingredients, which offers us the exclusive opportunity of positioning CBD as an NRF2-enhancing ingredient. This launch is the largest in LifeVantage's history more than doubling products offered from the TrueScience brand and opening up a new space for our distributors. In addition to this, we are also bringing back several of the limited time offer Axial flavors from the LTO launch last year. Strawberry Splash and Purple Grape, which were voted as favorites in our survey that we conducted after the LTO launch, will now be permanent additions to our product offering, as well as a limited time offering of a new seasonal summer flavor. As Steve mentioned, our primary goal in this quarter and into next year is to increase the total number of active accounts, which we will achieve by first, increasing the distributor enrollments, and second, by increasing the number of distributors and customers that place an order in the month following enrollment. We are inspired by the engagement we are seeing around these initiatives with our top distributor leaders. Beginning this week, They are hosting 30 opportunity meetings on Zoom and Facebook Live over the next 30 days. Training for these opportunity meetings took place earlier this week and was capped out after over 1,000 distributors tried joining the call, suggesting still excitement for the training and initiative. These presentations coincide with the launch of distributor-led tools on social media that allow for distributors and customer prospects to see and engage with reviews, testimonials, and third-party validation. Next month, as the pandemic restrictions continue to loosen, our top distributor leaders will begin hosting in-person meetings around the country. They will begin with select cities in May and June and then expand into other cities in future months. In the month of June, we will roll out a month-long distributor incentive titled Month of Action. This is a promotion that incentivizes and rewards key behaviors that lead to enrollments and is tracked individually, and with the distributor-wide scoreboard in the LifeVantage app. Finally, we are encouraged by the number of registrations we have received for the July Elite Academy. We incentivize registration by offering early access for the upcoming personal care launch, and to date have received over 2,100 registrations. This has the effect of creating excitement for both personal care launch as well as the July Elite Academy. With this increased engagement and alignment with our distributors, a return to in-person training and opportunity meetings, and behavior-based incentives, we believe these initiatives will allow us to return to top-line growth. Now let me turn this call back over to Steve to run through the third quarter financial results.

Thank you, Justin. Let me walk you through our third quarter results. Please note that I will be discussing our non-GAAP adjusted results. You can refer to the gap and non-gap reconciliation in today's press release for additional details. Third quarter revenue was $51.6 million, down 8% on a year-over-year basis. Revenue in the Americas declined 9.4% to $36.4 million, primarily reflecting a 6.2% decrease in total active accounts. Initial sales of our LifeVantage daily wellness product were encouraging despite the timing of the launch occurring later than we expected in the third quarter and with limited quantities available at launch. The virtual Elite Academy event we held in March was another event that we believe will have positive impact into Q4 and the next fiscal year. In Asia Pacific and Europe, Third quarter revenues decreased 4.7% year over year to $15.1 million. The total active accounts up 2.2%. Japan revenues were down 3.6% versus last year, reflecting continued restrictions due to COVID-19. Results in Australia and New Zealand were strong, 30.4% compared to last year's third quarter. Gross margin was 82.9% in the third quarter compared to 83.8% a year earlier. The decrease in gross margin was driven primarily by increased shipping to customer expenses due to COVID-19 and shifts in geographic and product sales mix. Commissions and incentive expenses as a percent of revenue increased 120 basis points year over year to 48.8%. This change is due mainly to increased costs and accruals associated with distributor recognition events and incentive trip promotion. Adjusting to FCNA as a percent of revenue was 27.9% compared to 30.2% for the prior year period. This decrease primarily reflects lower event and travel expenses as well as lower stock and incentive compensation expense. Adjusted operating income was 3.2 million or 6.2% of revenue compared with 3.4 million or 6% of revenue in the prior year period. Adjusted net income was 2.8 million or 20 cents per fully diluted share compared to 1.9 million or 13 cents per fully diluted share in the prior year period. The company's effective tax rate was 5.8% in the third quarter of fiscal 2021 compared to 37.7% in the prior year period. The decrease in the current quarter tax rate was attributable to favorable book to tax adjustments during the current year period in relation to taxable income. that positively impacted adjusted earnings per share by approximately 7 cents. On a fiscal year-to-date basis, the company's non-GAAP effective tax rate was 25.7% versus an effective tax rate of 9.9% in the prior year nine-month period. The increase in the current year tax rate on a year-over-year basis negatively impacted adjusted earnings per share by approximately 12 cents. On a full year basis, we expect our non-GAAP effective tax rate to be approximately 26% compared to a full year effective tax rate in the prior year of 22%. Adjusted EBITDA for the third quarter decreased $300,000 to 4.8 million compared to 5.1 million in the prior year period. Please note that all of the adjustments from GAAP to non-GAAP I discussed today are reconciled in our earnings press release issued this afternoon. We ended the third quarter in a strong financial position with $19 million of cash and no debt, and we continue to maintain a $5 million of availability under our revolving line of credit. which was renewed for an additional three years on April 1st of 2021. We used $2 million in cash during the third quarter of fiscal 2021 to repurchase approximately 213,000 common shares under our share repurchase authorization. As of March 31st, 2021, there remained $15.5 million available under the authorization. We expect to continue to be active with our share repurchase efforts in the future. We've invested $3.3 million of capital expenditures during the first three quarters of fiscal 2021 and anticipate CapEx net of reimbursed leasehold improvements of approximately $3.5 million during the full fiscal year. Capital expenditures in fiscal 2021 are primarily for building out our new office space and further development of our digital technologies. Turning to our fiscal 2021 outlook, we now anticipate our fiscal 2021 revenue to be $220 million to $223 million, primarily reflecting the impact of COVID-19 on our consumer base supply chain challenges on new product launches, and timing of geographic launches. We anticipate adjusted non-GAAP EBITDA in the range of $24 to $25 million and non-GAAP earnings per share in the range of $0.90 to $0.94. In summary, despite challenges in the third quarter, we remain very well positioned for growth. Consumers' interest in health and wellness is as strong as ever, and we have a broad portfolio of high-quality, innovative products proven to help optimize health and improve performance at all stages of life. Our corporate team and distributor leadership teams are aligned. Our financial condition is solid with a strong cash position and profitability. and we remain committed to driving value for our stakeholders. Now let me turn the call back to the operator to facilitate questions. Operator?

And at this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. And our first question is from Doug Lane with Lane Research. Please proceed with your question.

Yes. Good afternoon, everybody. Steve, I don't correct me if I'm wrong, but I don't remember you talking about developing a CBD product on previous calls. How long has this been in the works, and what's been the initial reaction from your distributor force on having a CBD product? Yeah, we've been working on this for, I guess over nine months now. And, you know, part of the drive behind that is some very preliminary research that we've been doing around the synergistic benefits between NRF2 and CBD. So these are, it's a product line of seven personal care products. All of them include NFR2 technology. And there's four of them that include CBD. And this is broad spectrum-based CBD with no THC. And so far, we officially announced it to our distributor leadership group at our Elite Academy in March and made available to them at that time the ability to purchase 2,000 packs that contained all seven products as well as enrollment kit for our next EA which will be in July and we've sold out those 2,000 units and actually today they are shipping out to our distributors and customers I guess it's all distributors that purchased those packs, and our official launch, where it'll be available to everyone, is going, will be on June 1st of this year. So far, the, you know, the product, there's been limited use of the product with our, you know, some of our distributors, but they sold out, you know, what we had available sold out very quickly, and like I said, it's just shipping out today. And is it shipping out globally, or will it be kind of a market-by-market rollout? It'll be market-by-market. Starting in the U.S.? Starting in the U.S., correct. Is it approved in Japan yet? Not yet. We're going through the regulatory process in all of our international countries. As you know, some of these things take a while just to go through But we were very careful when we were selecting the CBD to try to make it as acceptable in the countries that we're in as we currently are. Sounds good. Now, are you still employing a red carpet program per se, or have you sort of pivoted from that program now?

Hey, Doug, this is Justin, and yes, our red carpet program is in place, and it's actually gaining some great momentum coming out of this third quarter. So we have high expectations for that to continue and are starting to see some really, really good leaders that have joined us in the past few months.

Yeah, a lot of them. We've highlighted a little bit the growth that we've foreseen in Australia and New Zealand in particular. And, you know, we have a very solid distributor base there, but we've also added in the last six months or so a group via the red carpet program that is just killing it right now for us. Okay. And you also mentioned the return to in-person meetings. Are these small meetings, or are you going to have a – are you looking to have a global convention this year? Is this in all markets, or is this really starting up in the U.S.? Just a little bit more color on the resumption of in-person meetings.

You bet. Hey, this is Justin again. So the in-person meetings are really starting here in the U.S. market. There are a few in some of our other smaller markets. Mexico has had a few in-person meetings as well. But we're seeing our distributors really start to branch out in controlled environments, put together groups in smaller hotel meetings. The corporate office, we have a few people that are utilizing our corporate office to host the meetings here. And we have A couple like trainings that are coming up. We have a profile summit that we will be able to hold in person this time coming up in September. But October will be probably our next biggest event. And we're hoping to do a hybrid slash virtual event in Salt Lake City with about 2000 people in person and then virtually broadcasting to the rest of the field from there. So we're slowly starting to open up those doors. And our distributors are actually kind of leading the way, getting small get-togethers assembled as early as last month. Yeah.

Yeah, we started maybe six months ago or so, maybe nine months ago with COVID, having weekly trainings on Saturdays. And they've been, you know, we kind of thought that it would be lose some momentum because they're all virtual. But it's been amazing over the nine-month period of time, or actually it might even be longer than that now. But the numbers on those have held up through this whole period of time. And one of the other things that we're doing is the third Saturday of each month, We're now going to have, again, a combination of in-person in three different locations, and then one of those locations we will be broadcasting virtually. So three in-person, plus everyone can participate virtually. And again, that's our distributor group, really just pushing us because of just a need, desire that they have to get back together in person.

Great, thank you.

All right, thanks, Doug.

And our next question is from Ryan Werner with Private Investment. Please proceed with your question.

And Ryan, you're live. Not sure if your line is muted. Okay.

Are you there?

Hello?

Okay, we hear you now, Ryan.

I'm sorry about that. I had a question about the investment with the gig economy group and how that kind of playing out. It seems like it's been a couple of years, and the valuation of the thing has just stayed the same. And I was wondering how, like, that was going to be monetized, where it's going from here and stuff like that.

Yeah, no, I appreciate it. Thanks, Brian. So, you know, we have a – GEG was our partner in the development of the app that we have. And we have a minority interest in them. So, you know, from an accounting standpoint, it's accounted for on a cost basis. And because of the size or the percentage of ownership that we have. But, you know, we continue to partner with GEG and as well as, you know, we've, We've built quite a bit of capability within LifeVantage itself and have advanced fairly significantly over the last couple of years. The features, the reliability, the capability of the app, and we're seeing that manifest itself by an uptick in the adoption of the app by our distributors as one of the primary tools that they use, especially in the upfront enrollment process. So we do still have a relationship with GEG, and we monitor on a quarterly and annual basis the investments that we have with them. But a lot of the development and enhancements that are taking place with the app, LifeVantage is doing more and more of those right now.

Okay. All right. Thank you.

Great. Thank you.

And we have reached the end of our question and answer session. I'll now turn the call back over to management for any closing remarks.

Thank you for joining us today. And in closing, I just want to take an opportunity to thank all of our employees for their hard work and dedication, as well as our outstanding team of distributors. We remain confident in our business model and are focused on delivering the life-advantaged products our customers depend on. We hope you are all safe and healthy and look forward to updating you on our next call. Have a great day.

And this concludes today's conference, and you may disconnect your line at this time.