John Mills - Partner, ICR, IR Darren Jensen - President and CEO Mark Jaggi - CFO.

Steven Martin - Slater Capital Management.

Ladies and gentlemen welcome to the LifeVantage Q1 Fiscal Year 2016 Conference Call. As a reminder, today's conference is being recorded. And at this time I'd like to turn the conference over to Mr. John Mills, Partner Head at ICR. Please go ahead sir..

Thank you. Good afternoon, ladies and gentlemen and welcome to LifeVantage Corporation's fiscal first quarter 2016 conference call. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Mark Jaggi, Chief Financial Officer.

By now everyone should have access to the earnings release which went out this afternoon at approximately 4.05 PM 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'd 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 Form 10-Q and 10-K.

These risk factors contain a more detailed discussion of factors that could cause actual results to differ materially from those projected in any forward-looking statements. Please note that during today's call we'll discuss non-GAAP financials measures, including results on adjusted basis.

We believe these financials measures can facilitate a more complete analysis and greater transparency into LifeVantage's ongoing results of operations, particularly when comparing underlying results from period-to-period. We have included a reconciliation of these non-GAAP measures with today's release.

This also contains time sensitive information that is accurate only as of the date of this live broadcast, November 4, 2015. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today's release or call.

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 CEO, Darren Jensen..

Thanks John and good afternoon everyone. Our first quarter fiscal 2016 financial results were in line with our expectations and reflect stability in our revenue and operating results. Revenue for the first fiscal quarter of 2016 was $45.4 million which is essentially flat when compared sequentially to the fourth quarter of fiscal 2015.

Adjusted EBITDA increased to 43% to $4.5 million compared to $3.1 million in the fourth quarter of fiscal 2015. Mark will go over these results in more detail during his remarks.

In the quarter, we focused on executing our growth strategy that takes a deliberate approach to position LifeVantage for improved financial performance in fiscal 2016 and beyond.

Based on our year-to-date results and outlook for the remainder of the year, we're reiterating our annual guidance and continue to expect to achieve revenue operating margin and net income improvements in fiscal 2016. A few weeks ago, we held an annual convention in Phoenix, Arizona.

This was my first LifeVantage convention and I was very encouraged by the renewed level of distributor energy and engagement. We are especially pleased to report that we had record attendants and believe that this is a positive indicator of our distributors' excitement about our direction and future.

At convention we made a number of exciting announcements that improve the foundation of our business and growth trajectory. On our last call, I reviewed our 8 point growth plan which outlines the key areas of focus which we believe will enable us to execute on our growth strategy and return LifeVantage to a long-term consistent and profitable growth.

The key announcements that we made at this convention are examples of execution against our plan. First, one critical component of our 8 point plan is accelerating our international growth.

We announced the convention that we will be expanding our operations and distributor network into the European Union beginning with the United Kingdom and the Netherlands. We expect to begin conducting business building meetings within the two countries in February of 2016.

We currently have no presence in the EU and this represents a significant untapped opportunity for LifeVantage. It is our intent that this will be the first of many launches into the European countries. And we believe that the UK and the Netherlands are optimal gateway markets into Europe.

European distributors are product oriented business builders who leverage technology to drive their organizations.

According to the World Federation of Direct Selling Associations, the EU represented nearly $33 billion in retail sales in 2014, the United Kingdom alone represented nearly 4 billion in retail sales with over 0.5 million distributors and one of the fastest growing direct selling markets.

The Netherlands represents nearly a 150 million in retail sales with more than 48,000 distributors in the country. Additionally the Netherlands will become our largest hub for the entire region. Second in convention we announced exciting progress on our commitment to accelerate new product innovation, another key component of our 8 point plan.

We’ve expanded our revolutionary TrueScience Skin Care system with the launch of TrueScience Micro Lift Serum. This is already available for purchase by our distributors and preferred customers.

The TrueScience Micro Lift Serum is a natural way to instantly diminish the look of proceeds, baggy skins and dark circles around the eyes and as little as three minutes it visibly tightens, smoothes and firms the skin around the eyes quickly restoring a beautiful look radiance.

This new product is squarely in alignment with our strategy of offering demonstrable and effective products that enable users to see and still the results immediately. We intend to continue to introduce new products with the regular cadence, including a cyber-launch of Physique, our new weight management system planned for later this calendar year.

Third, enhancing technologies that facilitate business growth is another key component of our 8 point plan. It is crucial for companies to adapt to the ever changing digital and mobile world. The world of tech is moving over to mobile so our business must also be operable from our smartphones.

To that end, we launched a new mobile application that we refer to as LifeVantagePro at convention. It is important for LifeVantage to be a pioneer in the introduction of new technologies that are shaping our industries. Anyone with the smartphone or home computer now has the ability to manage their business from anywhere in the world.

The LifeVantagePro app enables distributors to prospect from the contact list, place orders, view up-to-date business qualifications and enroll people into their organizations all directly from their smartphone. This mobile platform enhances and simplifies our distributor’s business capabilities.

While it’s still early we are very encouraged by the initial response of the app as we saw immediately enrollment activity as soon as the app was launched. Including some preferred customers that enrolled as distributors.

We look forward to ongoing technological innovation that will put LifeVantage at the forefront of technology in the network marketing industry. We also continue to focus on the other five components of our 8 point plan. I’ll take a few moments to briefly review.

Point four, we continue to work towards establishing a focused, simple and concise message that tells our unique story in a way that is repeatable, duplicable and evokes motion. This message is becoming internalized into the culture of LifeVantage, both corporate and global distributor workforce.

We made progress introducing this message to our distributors at our convention and we’ll continue to refine all company materials to ensure consistency.

Continuing with our fifth growth strategy, over the past several months we have introduced improvements to our business model in the United States which are designed to enhance the purchasing habits of our existing customer base.

We did this by simplifying our enrollment options and the process by which new distributors and customers entered the business as well as the commission structure of each enrollment option in order to make it easier to explain and train. Since releasing this at the end of July we have implemented these enhancements in many of our markets.

Next on our sixth growth point, we continue to work on developing and implementing new incentives which would drive distributors to achieve higher monthly sales volume and increased retention. An example includes the introduction of a new bonus pool which offers additional performance incentives for distributors.

This enhancement is designed to incentivize our distributors to quadruple their current monthly sales targets.

The seventh point in our plan for returning to growth is to create an environment that will engage, ignite and incentivize both new and existing distributors to shorten the time it takes for them to build large sales organizations and advance to our key leadership brands In the U.S.

we launched this incentive program and the initial numbers indicate it is having the intended effect of aligning the right behaviors within our distributor organizations. Recently we have begun expanding this program into other markets.

And finally our 8 point, we are focused on implementing programs and strategies that attract new leaders to our distributor team. And this endeavor we are working with our build leadership to introduce the LifeVantage products and opportunity to season network marketing leaders.

In the past three months we have held three red carpet events to encourage proven distributor leaders to look at LifeVantage's many opportunities. Thus far a large percent of these new prospects realize the opportunity and have joined LifeVantage. We are taking a delivered approach with the above mentioned growth strategies.

We have enacted this 8 point strategy as early in fiscal 2016 as possible so as to realize the maximum gain in this fiscal year as well subsequent years. While this will result in some near-term pressure to our operating margins we expect that investing in these growth programs will generate meaningful long-term growth and profits to the company.

We encouraged about the progress we have made with our 8 point plan, we are still in the very early stages of implementing our growth strategy and it is important to remember that it will take time for these initiatives to be fully implemented across our entire organization and for this to translate to improve financial performance.

LifeVantage is a growth company and our focus needs to be on positioning ourselves for accelerated sales growth in coming quarters. Success in this endeavor will require continued strategic and prudent investment in specific areas of our business. Before I conclude my remarks, I would like to briefly comment on our recent reverse stock split.

Last month, we announced that we completed a 7 to 1 reverse stock split enabling us to comfortably exceed the NASDAQ minimum bid price requirement. It also reduced our number of shares outstanding to an amount that has more attracted to institutional investors and we feel confident will help enhance long-term shareholder value.

We are now fully in compliance with our NASDAQ continued listing requirements. I would like to thank all of our loyal shareholders for their support throughout the process. In summary we have a lot of hard work ahead.

But we have a strong platform in place, we look forward to continuing to implement improvements to our business model in capitalizing on the significant opportunities for LifeVantage. With that, I'll turn the call over to Mark Jaggi..

Thanks, Dan. Good afternoon everyone. For the first quarter ended September 30th, we reported revenue of approximately $45.4 million. This was essentially flat on a sequential basis compared to $45.3 million in the fourth quarter of fiscal 2015 and compares to revenue of 51.6 million in the first quarter of fiscal 2015.

On a sequential basis revenue in the Americas increased 3% and revenue in the Asia Pacific region declined 8%. On a year-over-year basis first quarter fiscal 2016 revenue in the Americas decreased 5% and revenue in the Asia Pacific region declined 30% primarily due to lower sales in Japan.

Revenue for the quarter was negatively impacted 1.9 million or approximately 3.7% by foreign currency fluctuation. Looking at our customers we ended the first quarter of fiscal 2016 with 64,000 total active distributors.

This represents a slight decline from 65,000 at the end of the fourth quarter fiscal 2015, but the decline rate is slowing compared to previous sequential periods and the decline is concentrated in the Asia Pacific region.

The number of preferred customers at the end of first quarter of fiscal 2016 was 114,000 a slight decrease compared to 115,000 at the end of fourth quarter 2015.

Our gross profit margin and gross profit for the first quarter was 84.6% and 38.4 million respectively compared to 83.9% and 38 million in the fourth quarter in the fourth fiscal quarter of 2015 and compared to 89% and 46 million for the first fiscal quarter of 2015.

Gross margin and gross profit in the first fiscal quarter of 2015 benefited from approximately $2 million in proceeds recovered and related to the company's December 2012 product recall. The benefit was recognized in cost-of-sales in that quarter.

Commission and incentives expense for the first quarter was 48.6% of revenue compared to 47.8% of revenue in the fourth fiscal quarter of 2015 when compared to 47.6% of revenue in the same period last year. The increase is due primarily to the shift in mix of our distributor in rolling [ph].

As Darren mentioned in the sixth point of our growth strategy we implemented incentives to help distributors achieve higher monthly sales volumes and promote retention. As a result of this strategy in the first fiscal quarter we enrolled more business builders to have a higher initial percentage payout.

SG&A expense for the first quarter was 30.1% of revenue compared to 32.6% of revenue in the prior sequential quarter when compared to 26.4% of revenue in the same period last year. SG&A expense in the first fiscal quarter of 2016 includes $1.1 million in one-time executive transition expenses.

Operating income for the first quarter of fiscal 2016 was $2.7 million compared to $1.6 million in the fourth fiscal quarter of 2015 and compared to $7.8 million in the first fiscal quarter of last year. Prior year operating income includes the aforementioned $2 million benefit related to the December 2012 product recall.

Adjusted EBITDA was $4.5 million for the first quarter of 2016 compared to $6.8 million in the prior year period. As Darren stated on a sequential basis, adjusted EBITDA increased 43% from $3.1 million in the fourth quarter of fiscal 2015 underscoring that we began to see some improvements in our operating results.

Net income for the first quarter was $1.1 million or $0.08 per diluted share calculated on approximately 13.8 million fully diluted shares. This compares to $4.7 million or $0.32 per diluted share calculated on 14.8 million fully diluted shares in the same period last year.

Please note that share counts for both periods reflect post-reverse stock split amounts. Turning to our balance sheet, our cash and cash equivalents as of September 30, 2015 were $13.7 million compared to $13.9 million at the end of fiscal year 2015.

In the first fiscal quarter of 2016 we generated cash flow from operations of $2.8 million compared to $5.1 million in the first fiscal quarter of 2015 which again includes the $2 million benefit related to the aforementioned product recall. We repaid $3.1 million of debt during the first fiscal quarter of 2016.

Now I'd like to review guidance for fiscal 2016. We are reiterating our annual guidance, our earnings per share is updated based on the effectiveness of the 7 to 1 reverse stock split in October. In fiscal 2016, we expect to generate full year revenue in the range of $195 million to $210 million representing a 2% to 10% increase over fiscal year 2015.

We expect our operating margin to be in the range of 8.5% to 10.5%. Following the reverse stock split, we now expect earnings per diluted share in the range of $0.56 to $0.77 based on an estimated 14.3 million diluted shares and a 36% effective tax rate.

Our pre-reverse earnings per share range was $0.08 to $0.11 based on an estimated pre-reverse 100 million diluted shares. So at this point, I'd like to open up the call for questions..

Thank you. [Operator Instructions]. And we'll go first to Jim Galloway [ph]..

Thank you. Just a couple of questions.

First could I get some specific steps that you planned to improve Japan and what expectations do you have?.

Jim, this is Darren. Thank you for the question. Yeah, definitely Japan is on everyone's mind here at the company.

At the beginning I think it was right at the end of September beginning of October, we had our first major event since I joined the company it was in the lead academy and I believe that lead academy will play an important role in the stabilization of that market.

With many of the programs on the 8 point plan that we have our ability to roll those out internationally there is a delay in doing that, primarily in Japan they have certain requirements for pre-notification to the market as well as notifying all the distributors in writing before those changes occur.

So basically the plan and the steps that we are using are nearly identical with the U.S. plan. But basically there is a little bit of a lag time between their implementation and the implementation we are able to do in the U.S.

So at the elite academy we announced many of the steps including the addition of new pools, we introduced the more focused messaging that we have, we announced that we have new technology coming out in the form of an app. We had launched the basic all the basic steps we could including the platinum packages we have the pro 5 acceleration.

We did other promotions, we had training tools, we introduced the red carpet program to them, all of these are some of those core elements that we are using with the United States. So those were the specific steps we are taking, they are just the couple of months behind..

Darren, do you have comfort in the leadership in Japan or do you have some people that you might bring in?.

Well, that would be as probably more of an HR question. I don't know if I would answer that in public. Yes, from - let's talk about I think the key components of any market rather than discussing employees per se the key part of the growth in any market and including Japan is still leadership.

Basically what I found of last 26 years is that one leader or can change the course of country and we have many good leaders that are in Japan and we are working with them to reengage them and to energize them in building their business because we have great leadership already and many of the programs that I just announced like the red carpet program, the pro 5 accelerator, the platinum packages those are all designed to make it more attractive to leadership outside of the company to bring them in because we always need more leadership and the better and the more filled leadership that we have the faster will give a turnaround in that country..

Thank you.

One last question, is this a period now after this conference call that both you and Mark are able to purchase shares if you desire in the company?.

Well, I know we desire. But I believe that our window begins sometime next week is when it opens..

Okay. Good luck, thank you..

Thank you..

Thank you..

And we'll go next to Steven Martin with Steven Martin with Slater Capital Management..

I don't know if you just commented in your discussion of Japan.

But can you give us an idea when you would expect Japan to at least flatten out in terms of revenue either on a constant currency or reported basis?.

From my standpoint based on the introduction and based on what we've seen in the U.S. and some of the change in behavior that we see there and now launching those programs into Japan I would have an expectation that we would that bottoming out sometime in second quarter..

Okay and likewise with the active distributors and active preferred customers, when would you expect us to see a sequential improvement and then year-over-year flattening out?.

I think on the numbers that you read - I was thinking of the numbers that we just read. So the increase in the sequential number I don't want to get too much into this quarter.

But everything is based on excitement within the field and as there is additional excitement and confidence within our independent contractors that translates into behavior and if you look at our most recent event generally I think a good barometer of that is our major event.

We had record attendance as well as we had in anticipation of our next event we also had record sales on the pre-purchasing of those tickets, we’ve already sold well over 7,000 for the next training which is basically has I don’t think we’ve ever done that in our history so I think that would be a good indicator of the enthusiasm and still which at some point we’ll translate in, I would surely expect that come in in second quarter..

Okay the new product was there a presale process for the new product and if so how did it do?.

There was no presale process it was announced at convention and made available at that time. So the product’s basically been available for I don’t know a couple of weeks..

And you comment I know it’s new quarter can you give us some comment on how would they do or how it’s done versus sort of your expectation?.

Again it is a new quarter we had no sales of the Micro Lift Serum in Q1 and at the event we had pretty much what we expected. It’s a really good product and the distributors responded very well to it without giving you specific numbers on that it’s met our objectives, it’s met all that we had expected it to do at this point.

And again it’s only been a few weeks at this point but at the convention it was extremely well received..

Okay couple of material things, warrants are they all done now are all share-shares and there’s no more overhang?.

We do have a little bit of warrants still that we got about 90,000 out there it’s not so much but yeah there’s a little bit left out there a $1.40..

Yeah 90,000 compared to what we’ve been living with is almost up..

That’s right..

And can you comment on the long term debt the relationship with PCW how you expect that to play out and if and when you would expect to either refinance it or have an ability to buy back stock again?.

No that’s a really good question, our relation with PCW is very good matter of fact one of their representatives was in our convention, we got together and chatted about the business quite a bit and it’s a good relationship right now.

In terms of looking at refinancing we’re in the second quarter I'm 2.5 months into this company and I'm looking at every piece of the balance sheet and that’s a pretty big piece of the balance sheet.

Our rates are you can look at them up they are sitting right around 8.75% and frankly I believe we can do a lot better and so yeah we’re looking to that pretty hard. I want to give you a whole lot of detail around that but that’s where we are..

Okay.

And one last one the executive transition costs is that on or is that behind us so when we get into the second quarter there’s nothing of that nature or is there any other your predecessors were very bad at giving us a heads up on unusual or extraordinary items so are we going to see any more vast flow through in the second quarter and is there anything you know about today that you can tell us that would be of an unusual nature positive or negative for the second quarter?.

Yeah those are really good questions actually let me take the first one first, the executive transition cost are substantially completed. There is a very small piece that we’re just charging off in October and that’s done. So and it’s nothing like what you’ve seen in the past it’s miniscule relative to the other stuff.

Every dollar here for me is a big deal but so that’s executive transition cost that done you asked it was very–very sensitive company with the right thing to do and we’re done with that.

The second question is there anything else kind of outstanding in the future when you ask the question about refinancing if we refinance we have a large portion and can I give a number.

A large portion it would be similar in the range of $1.5 million to $1.7 million of amortization of unamortized charges, non-cash that we are currently amortizing with that TCW loan. If we refinance we will charge that all ones. So that will be a one-time non-cash hit. And kind of an - it is what it is.

If we're saving a whole bunch of cash and happy to do it right..

Right there is no prepayment penalty in the TCW is there?.

Correct, that's correct..

Okay. And as it relates to the cost reductions that you put in place, is the run-rate of SG&A and in the current quarter sort of what we should expect going forward..

So yeah I'll make it a quick answer here on that one. The second quarter well Darren explained earlier, we are investing and consolidating as much of our 8 point plan and the spending associated with the 8 point plan into the first half of this year. So we're definitely investment spending right now for growth.

And so I guess that would be the best way. The $4 million is come into provision. And yeah we're going to spend some money on growth yes we are. And we're doing a large majority of that and have done some of it in the first quarter and a lot of that in the second quarter as well. So that's probably the best way to answer that..

And ladies and gentlemen that does conclude the Q&A portion of today's conference call. I'd like to turn it back to Darren Jensen for comments and closing remarks..

Thank you and thank you everyone for joining us today. We appreciate your continued interest and loyalty in our company. And we look forward to speaking and meeting with many of you over the next few months. Have a great afternoon. Goodbye..

And this does conclude today's conference everyone. We thank you for your participation. You may now disconnect..