John Mills - ICR Dave Manovich - Executive Vice Chairman Dave Colbert - CFO.

Eric Weisenberger - Private Investor.

Good day and welcome to this LifeVantage Third Quarter Fiscal Year 2015 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir..

Thank you. Good afternoon, ladies and gentlemen, and welcome to LifeVantage Corporation’s fiscal third quarter 2015 conference call. On the call today from LifeVantage with prepared remarks are Dave Manovich, Executive Vice Chairman; and Dave Colbert, Chief Financial Officer.

By now everyone should have access to the earnings release which went out this afternoon at approximately 4:00 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of LifeVantage’s website at 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 the 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 management and involve inherent risks and uncertainties including those identified in the Risk Factors section of LifeVantage’s most recently filed 10-K and 10-Q.

These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, May 06, 2015.

LifeVantage assumes no obligation to update any forward-looking projection that may be made in today’s release or call. And based on the number of participants on today’s call, during the Q&A session, we ask that you please limit the number of your questions to three. Now, I will turn the call over to the company’s Executive Vice Chairman, Mr.

Dave Manovich..

Thanks, John, and good afternoon, everyone. It’s been a very busy three months since our last conference call. And during the quarter, we worked diligently to realign our cost structure. We believe this effort correctly aligns expenses with our current revenue trends.

Additionally, we are very excited about the recent appointment of Darren Jensen as our next President and Chief Executive Officer. Throughout the transition to a new CEO, we have continued taking the necessary steps to reignite top-line growth.

Upon joining the company in mid May, Darren will have the flexibility to further shape, drive, and articulate the company’s strategic initiatives. Officially, Darren takes the CEO chair or May 18, and he will lead the next investor call.

As a short introduction, let me assure you that we have conducted an extensive national search and evaluated a number of highly qualified candidates. He stood out with his unparallel track record of success and leading the development and execution of business expansion and sales growth strategies.

To provide some background, Darren has 25 years of global network marketing experience with companies selling a variety of product types including nutritional supplements and personal care products.

He most recently serviced as President of the Americas and Chief Sales Officer for Jeunesse Global, a personal care and nutrition network marketing company.

During his tenure Jeunesse, the company was listed in the 2014 Inc 500 with approximately 1800% revenue growth over a three year period and was the fastest growing direct selling association company in America for 2014. He has experience with other leading network marketing companies including USANA, Amway, Nu Skin, and Synergy worldwide.

We’re confident that Darren has the right experience to lead LifeVantage in our next phase and capitalize on the many untapped opportunities. Our third quarter results were in-line with our expectations. We reported revenue of $45 million in the current fiscal quarter.

While our year-to-date revenue in the Americas grew approximately 3% compared to the prior year, our Asia Pacific revenue declined 28%. Overall, we are not satisfied with our current revenue levels. However, we believe with our strong product portfolio and committed team of talented distributors, we can perform much better in all of our markets.

We generated $3.3 million in adjusted EBITDA in the third quarter and $14.3 million for the first nine months of fiscal year 2015.

Our ability to generate healthy cash flow, despite the number of challenges that our business has faced over the past several quarters is a testament to the strong foundation of our company and the strength of our business model. Based on our year-to-date results, we are reiterating our annual fiscal year 2015 guidance.

We are aggressively looking for ways to reduce operating expenses while simultaneously working to increase revenues.

We recently implemented a headcount reduction that has reduced our annual recurring payroll related expenses by approximately $1.3 million and have targeted another approximately $2.7 million in SG&A expense reductions that will occur over the course of fiscal 2016.

While the expense reductions were necessary, our emphasis has focused on growing our top line and we are very mindful not to reduce our investments in areas that are expected to fuel future revenue growth. Our company has a portfolio of scientifically validated products coupled with the strong distributor network.

While Protandim and the Nrf2 story is our lead offering, we have expanded into additional product categories. In the case of TrueScience, we have expanded our product category to provide a full spectrum of skin care products built around our core TrueScience anti-aging skin care cream.

AXIO, our energy drink is also a complementary product that is consistent with our underlying strategy of offering scientifically validated products in the look, feel, and perform better categories.

Also, we are looking at doing a better job of engaging with our distributors and providing them with the right tools to improve the market penetration of our suite of products. Darren, and our new CEO, has significant experience with leveraging these revenue drivers.

We are confident that under his leadership we will benefit from increased focus, enthusiasm, and expertise from our distributors and our customers. I’d now like to take a few minutes to discuss, Japan. In the third quarter of 2015, Japan represented approximately 20% of our overall revenue.

Improving our business in this important market is a top priority, with our biggest challenge being the contraction in revenue.

We are extremely disappointed that pressures in Japan market continue to impact our overall financial performance in a significant manner and we believe that we can do better, The Japan market has been significantly impacted by negative distractions.

While there continues to be uncertainty regarding the full impact these distractions will have on future revenue, we have taken actions to mitigate the impact and we continue to monitor the progress of these actions.

In January, we hired a VP of Sales specific to Japan to strengthen our leadership in that market with the goal of improving distributor unity and revenue. Also, we restructured our Japan Field Advisory Board with the intended effect of streamlining the partnership process and focusing leaders on positive in-country distributor activities.

In addition to promoting greater leadership and unity in the market, in the third quarter we launched our AXIO energy product line in Japan and created new country specific marketing tools and materials that we believe will be a significant benefit to our distributors as they build their businesses.

We believe that we are taking the necessary corrective actions to move our business in the right direction, but expect that turnaround will take additional time. Over the course of the last two quarters, we have seen Japan revenue level at approximately $10 million per quarter and we expect the fourth quarter to be about the same.

Allow me to move to our commitment of further international expansion. We recently announced that we commenced operations in Thailand. We opened an office in Bangkok which will serve as a central location for distributors to host meetings and events and to conduct distributor training.

This office allows for expedited purchasing and receiving the LifeVantage products. The World Federation of Direct Selling Association reports that Thailand is a market of more than 11 million distributors that generated total revenues of more than $3 billion in 2013.

Our TrueScience Regimen is currently the only product registered in the country, and because of this, we expect modest top line contribution to revenue until our other products can be registered.

We believe, however, this will give us a foundation in Thailand and is directly in-line with our commitment to expand our operations in countries that we believe represent long term growth opportunities.

We also believe in our existing markets that a contributing factor to the slower than anticipated revenue growth is the transition of our distributors' businesses from a core product to multi-product offering. As we provide additional marketing tools to our distributors, we believe they will become better trained in selling multiple product lines.

We believe they have the opportunity to expand on market penetration in all of our existing markets with our full suite of products. Finally, as many of you are aware, we received a notice of non-compliance from NASDAQ last month in regards to the minimum bid price requirement.

To remove the non-compliance notice, we need to achieve a $1 minimum bid price for 10 consecutive trading days. We believe the basic fundamental business strategy discuss today to return the company to top line growth and increased adjusted EBITDA will assist in achieving compliance.

In addition, we are evaluating all options to return to full compliance with the NASDAQ listing requirements.

In summary, as we are nearing the end of fiscal 2015 and looking towards next year we believe that we are taking the right steps to return to being a growth oriented company that leverages our scientifically backed [ph] products and our strong distribution network.

We have hard work ahead of us but with our recent CEO appointment we believe that we’re on the right path to build upon prior successes and capitalize on the opportunities available to our company. With that, I’ll turn the call over to Dave Colbert..

Thank you, and good afternoon, everyone. For the third quarter ended March 31, we reported revenue of approximately $45 million, compared to $55 million in the prior year period. During the quarter, revenue in the Americas increased 1%, while revenue in the Asia Pacific region declined 45%.

A year-over-year decline in the Asia Pacific region is primarily due to Japan’s lower volume, negative foreign currency exchange and a benefit in the prior year period from customers accelerating purchases in advance of announced price increases that went into effect on April 1, 2014.

Revenue for the quarter was negatively impacted $1.8 million or 3% by foreign currency fluctuation. Our gross profit margin and gross profit for the third quarter was 83.3% and $38 million versus 84.5% and $47 million for the prior year quarter.

Commission and incentives for the second quarter was 48% of revenue, compared to 49% of revenue in the same period last year. We expect our commission and incentive expenses to remain at approximately 48% for the full year. SG&A expenses for the third quarter was 32% of revenue compared to 28% of revenue in the same period last year.

SG&A expenses in the current quarter include $1.2 million of one-time expenses including severance cost related to the departure of the company’s former CEO, the engagement of an executive search firm, and one-time investments in new sales events.

Net income for the third quarter was $600,000 or $0.01 per diluted share calculated on approximately 98 million fully diluted shares. This compares to $2.5 million or $0.02 per diluted share calculated on 107 million fully diluted shares in the same period last year.

Turning briefly to our year-to-date results, for the first nine months of fiscal 2015, revenue was approximately $145 million, compared to $158 million in the prior year period. Revenue in the Americas increased 3%, while revenue in Asia Pacific region decreased 28% due primarily to the challenges in Japan.

Foreign currency fluctuation negatively impacted our first nine months revenue by $4 million or 7%. Net income for the first nine months of fiscal 2015 was $6.8 million or $0.07 per diluted share, compared to $9 million or $0.08 per diluted share in the prior year period.

Current year net income includes the pre-tax benefit of approximately $2 million from insurance proceeds related to the December 2012 product recall. It also includes the $1.2 million of one-time expenses previously discussed in this quarter.

The company generated $3.3 million of adjusted EBITDA in the third quarter and $14.3 million of adjusted EBITDA for the first nine months of this fiscal year. The company’s cash and cash equivalent at March 31, 2015 were $15.4 million compared to $20.4 million at the end of fiscal year 2014.

The company repaid $3.5 million of debt during the first nine months of fiscal 2015. In addition during the first nine months of fiscal 2015 the company has returned $9.9 million to shareholders by repurchasing in a total of $7.6 million shares.

Inventory increased $2 million compared to June 30th, 2014 which is related to the company’s recent product launches through science and AXIO as well as the recent decline in revenue. On a sequential quarterly basis, inventory decreased $1.2 million highlighting our inventory control efforts.

In the 10-Q we filed today, we disclosed amended terms of the adjusted EBITDA covenant and our credit facility for the fiscal 2015 third and fourth quarters. We are in compliance with all covenants in the amended agreement.

During the fourth quarter, we will be accelerating debt payments and we will pay a total of $5.6 million in principal and reduce our debt balance to $21.6 million by June 30. This will enable us to reduce our interest expense in the coming year and complements our projected $4 million in annualized cost reductions.

We will also continue to work with our creditors in an effort to further modify our adjusted EBITDA requirements going forward. As we execute on our revenue initiatives, our improved cost structure will enable us to continue to generate healthy cash flow. Now I'd like to review guidance. We're reaffirming our guidance for fiscal year 2015.

We continue to expect to generate full year revenue in the range of $185 million to $195 million in fiscal year 2015. We're modeling Japan to decline by approximately 35% on a year-over-year basis.

We expect our operating margin to be in the range of 7% to 9%, and earnings per diluted share in the range of $0.07 to $0.08 based on an estimated 100 million diluted shares and a 33% effective tax rate. And at this point, I believe we can open up the call for questions..

[Operator Instructions]. And we'll take our first question from Eric Weisenberger, private investor..

Yes, hi, thank you. I'm allowed three questions.

One, I did some quick math and if I'm looking at it correctly, you paid an average of $1.30 a share in the stock buyback with the $9.9 million; is that roughly right?.

Correct..

So then you haven’t been buying much in the last two or three months, it looks like as the stock's been under a $1.

So is there going to be more stock purchases ongoing now that stock is setting new lows?.

Yes, this is Dave Colbert. Eric, it’s a matter of capital allocation at this point. We were buying and aggressively buying stock and did purchase up to $10 million, and at the present time we've turned our focus to really looking forward to fiscal '16 and aggressively getting our debt balance.

And by the end of this quarter, we'll be below $22 million in debt which is going to really help us out from reducing our interest payments going forward and give us more financial flexibility and liquidity for growth initiatives to really we can let our newly appointed CEO come in with some growth initiative ideas and give him the flexibility.

So it's really capital allocation at this time and that's our focus getting to this fourth quarter, fiscal quarter..

Well, okay.

My second question is why have we not seen directors and management officers purchasing the stock which would be disclosed of course down at the $0.77 levels where it's been for quite some time? I can't understand why the directors of management haven’t shown that they believe in this company and they're buying stock aggressively because it's so cheap; why has none of that happened?.

Well, just based on the calendar we go into what's called blackout periods. And these blackout periods last for about a month and a half before the quarter ends and certainly until after we disclose earnings and also during the quarter we're limited to what we can do based on what non-public information we are privy to.

So we have limitations to how aggressively we can go out there and buy stock..

Right, but so far there's been none, and the general counsel, in fact, sold stock at $0.77. I think that sends a terrible message to stockholders. Just a comment. And finally, the new CEO Jenson's compensation package looks very generous to me, it was disclosed of course. And he had said one of the ways he could depart is if the stock is delisted.

He must know that we've already been warned about that.

So can we interpret his joining anyway that he feels he can get the stock back over a dollar in the next six months?.

Yes, this is Dave Manovich. Certainly, our strong focus as we indicated in the release is on growing the top line and coming back into compliance.

Again, we have a number of tools that we can utilize to come back into compliance and we're looking at all of those and we fully intend on pursuing those and getting back into compliance with the NASDAQ requirements..

So you can't be more specific than that or on the stabilization of Japan, you mentioned distractions. Can you be any more specific about what those were, negative distractions? That’s my last question..

Yes, we've discussed those in the past that we’ve had departure of some of our distributors there, and that has created some problematic situations that we've had to -- our management over there dealing with. And we're working through a number of those.

And as you can see, when we -- during the course of the call that we have a stabilization of revenues that you see over the last couple of quarters, we expect that to continue during the current quarter. So we're making a lot of progress against that, but it's been an issue that’s taken us a number of months to fully address..

Okay, thank you..

[Operator Instructions]. And ladies and gentlemen, that does conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Manovich for closing remarks..

Yes, I want to thank everyone for joining us today. And we certainly appreciate your continued interest and loyalty to the company, and look forward to introducing you to Darren Jenson in the near future and reporting on our progress, thank you..

Ladies and gentlemen, that does conclude today’s conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day..