Scott Van Winkle - Partner Darren Jensen - President & CEO Mark Jaggi - CFO & Treasurer.

Will Hamilton - Manatuck Hill Partners Steve Martin - Slater Capital Management.

Welcome to the today's LifeVantage Fiscal Third Quarter 2016 Earnings Conference Call. 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 Scott Van Winkle with ICR.

As a remainder, today's conference is being recorded. And now, I would like to turn the conference over to Mr. Van Winkle. Please go ahead, sir..

Thank you and good afternoon, ladies and gentlemen. Welcome to LifeVantage Corporation's fiscal third 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 p.m. Eastern Time. If you have not received the release, it's 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 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 management and involve inherent risks and uncertainties, including those identified as Risk Factors in LifeVantage's most recently filed Form 10-Q and 10-K.

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 statement. Please note that during today's call we'll discuss non-GAAP financial measures, including results on an adjusted basis.

We believe these financial 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'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, May 4th, 2016. LifeVantage assumes no obligation to update any forward-looking projections 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 limit the number of questions to three. Now I turn the call over to the Company's CEO, Darren Jensen..

Thank you, Scott and good afternoon, everyone. We're pleased to report the highest quarterly revenue in the company's history. This could not have been achieved without the combined efforts of our incredible distributors, enthusiastic field leaders and dedicated corporate employees.

I want to personally thank them and congratulate them on a quarter well done. Now let's discuss the results. Our record revenue for the third quarter of 2016 was $56.2 million which represents a 24.4% increase compared to the prior-year period and an 8% increase sequentially.

This also includes a 33.8% year-over-year increase in the Americas and sequential growth in both the Americas and the Asia Pacific and Europe regions. We're pleased with the continued favorable sales trends. During the quarter, we completed the PhysIQ rollout with the introduction of Cleanse.

PhysIQ continues to build momentum and grow as a percentage of sales. However, we have been busy preparing for what very well may be the biggest product introduction in the company's history with the upcoming cyber launch of Protandim NRF1 Synergizer which is just two weeks away on the 17th of May.

We'll discuss our product innovation and NRF1 in greater detail momentarily. We have spent time on these conference calls over the past quarters discussing our eight-point growth strategy.

I'm pleased that our financial results clearly demonstrate the success of this strategy and I'm excited to report that we have accomplished this plan with all aspects of the strategy firmly in place and accelerating in many ways.

We're now seeing the benefits of building a highly duplicatable business opportunity, further enabling our independent distributors to be successful. Our focus is on driving achievement across the fields.

To this end, we're providing world-class training to our independent distributors with a focus on achievable goals and providing industry-leading product innovation rooted in science and efficacy. This combination is a recipe for success that is translating into greater distributor engagement, higher enrollments and improved retention.

This was evident in our third quarter results and is the foundation for future success. Our accelerated product innovation is providing greater opportunity and positive consumer outcomes. During the third quarter, we introduced Cleanse, completing the launch of PhysIQ weight management system.

PhysIQ was a strong performer during the third quarter, benefiting from the seasonal strength of weight management during this time of year and we continue to see strong adoption rates across our distributor field and preferred customer base.

With new product momentum in place, we're excited for the prospects ahead as we launch Protandim NRF1 Synergizer later this month. Given the tremendous success of our PhysIQ cyber launch, where we estimated approximately 50,000 viewers, we're replicating this successful model with the cyber launch of NRF1 on May 17th.

The release of NRF1 is an important strategic initiative for the company in that we have taken our standalone flagship product and expanded it to become a branded family of products. NRF1 is a great example of our science-based approach to new product development and brand-building initiatives.

Protandim NRF1 Synergizer is formulated to strengthen the mitochondria which are the powerhouse of all cells for better cellular health. It is designed to work synergistically with our Protandim Nrf2 Synergizer and further enhance the body's ability to naturally product antioxidants and reduce the effects of cellular stress.

NRF1 is very much a companion product to our top selling Protandim Nrf2 Synergizer and we see the opportunity to not only support our consumers with a highly efficacious edition to their daily nutritional routine, but drive higher revenue given the complementary nature of the new product.

Following the cyber launch, product will be immediately available for sale in the United States and the global rollout will follow shortly thereafter. Now, moving into our progress with international expansion initiatives. We entered Europe during the quarter with our March launch in the United Kingdom and are pleased with the early results.

We believe the UK is the ideal market to begin building our European business. The UK is one of the world's fastest-growing direct selling markets according to World Federation of Direct Selling Associations.

Furthermore, the typical UK distributor is a product-oriented business builder that leverages technology which is an ideal fit with LifeVantage's core strengths. We anticipate the further expansion of our European footprint with the launch of the Netherlands over the coming months.

In summary, we're encouraged by what we have accomplished thus far this year, particularly our achievement of record quarterly revenue and accelerating year-over-year growth. Our growth strategy was designed to enable us to seek gains beginning in fiscal year 2016, with accelerated and further improvements expected in future years.

We have launched new products, including a new brand, entered new international markets, adapted to the ever-changing regulatory landscape, enhanced our technologies and are preparing for what could be our most promising new launch in history with the Protandim NRF1 Synergizer. With that, I'll turn the call over to our CFO, Mark Jaggi..

Thanks, Darren. Good afternoon, everyone. For the third quarter ended March 31st, 2016, we reported record revenue of $56.2 million. Revenue increased 24.4% when compared to $45.2 million for the prior-year period and 8% on a sequential basis compared to $52 million for the second quarter of fiscal 2016.

Revenue in the Americas increased 33.8% year over year and 9.9% on a sequential basis during the quarter. Revenue in the Asia Pacific and Europe region continues to improve, declining just 0.9% year over year and increased 1.7% on a sequential basis. Sales in Japan declined 2% sequentially.

Given calendar Q1 is a seasonally softer quarter in Japan, we continue to believe that the market is stabilizing. Foreign currency did not have a material impact during the quarter.

Looking at our customers, we ended the third quarter of fiscal 2016 with 71,000 total active distributors, up from 67,000 at the end of the second quarter of fiscal 2016 and 66,000 a year ago.

The continued improvement reflects our success in improving distributor engagement and attracting and retaining new distributors as part of our growth strategy. The number of preferred customers at the end of third quarter of fiscal 2016 was 118,000, an increase when compared to 117,000 at the end of second quarter of 2016 and 114,000 a year ago.

Our gross profit margin was 82.7% compared to 84.9% for the second fiscal quarter of 2016 and compared to 83.3% the prior-year period. The lower gross margin percentage in the current quarter largely reflects a changing product mix.

Commission and incentive expenses for the third quarter were 50.2% of revenue compared to 52.5% of revenue in the second fiscal quarter of 2016 and compared to 47.9% of revenue in the same period last year.

The increase year over year is due primarily to the faster rate of growth and rank advancements among our independent distributors, costs associated with adapting to the evolving regulatory landscape and distributor growth initiatives. However, on a sequential basis, we have begun to see improvement.

SG&A expenses for the third quarter were at 26.1% of revenue compared to 26.6% of revenue in the second quarter of fiscal 2016 and compared to 32.1% of revenue in the same period last year.

Third quarter of 2016 SG&A includes approximately $100,000 of costs related to the executive team transition compared to approximately $500,000 of one-time items in the second quarter of fiscal 2016 and $700,000 in the prior-year period.

Operating income for the third quarter of fiscal 2016 was $3.6 million compared to $3.0 million for the second fiscal quarter of 2016 and compared to $1.5 million for the prior-year period. Operating income for the third quarter and the prior-year period includes the aforementioned executive transition items.

Adjusted EBITDA was $5.1 million for the third quarter of 2016 compared to $3.3 million for the prior-year period and improved from $4.5 million from the second fiscal quarter. Net income for the third quarter was $1.0 million or $0.07 per diluted share calculated on approximately 14.1 million fully diluted shares.

This compares to $0.6 million or $0.04 per diluted share calculated on 14.0 million fully diluted shares in the same period last year. Please note that share count for both periods reflect post-reverse stock split amounts.

Adjusted net income, we brought this up last call, but adjusted net income excluding the previously-mentioned one-time charges and excluding the $1.0 million after tax write off of deferred debt transaction costs associated with refinancing our term loan was $2.0 million for the third fiscal quarter of 2016 or $0.14 per diluted share compared to adjusted net income of $1.0 million or $0.08 per diluted share for the comparable period last year.

Both net income and adjusted net income for the third quarter fiscal 2016 were adversely impacted by an increase in our effective tax rate which rose to 43.6% this quarter. The higher tax rate reflected a revaluing of our deferred tax asset in Japan.

Turning briefly to our year-to-date results, for the first 9 months of fiscal 2016, revenue was approximately $153.5 million compared to $145 million in the prior-year period.

Revenue in the Americas increased 13.8% while revenue in Asia Pacific and Europe decreased 14.6% due predominantly to lower sales in Japan that occurred primarily during the first quarter of fiscal 2016. Foreign currency fluctuation negatively impacted our first 9 months' revenue by $2.7 million or 1.9%.

Adjusted EBITDA was $14.1 million for the first 9 months of fiscal 2016 compared to $14.3 million in the prior year. Net income for the first 9 months of fiscal 2016 was $3.7 million or $0.26 per diluted share compared to $6.8 million or $0.47 per diluted share in the prior-year period.

Adjusted net income for the first 9 months of 2016 was $5.7 million or $0.41 per diluted share compared to $5.9 million or also $0.41 per diluted share in the same period last year. Turning to our balance sheet, our cash and cash equivalents as of March 31st, 2016, were $8.5 million compared to $13.9 million at the end of fiscal year 2015.

In the third fiscal quarter of 2016, we invested $6.4 million in incremental inventory to resolve out-of-stocks, support growth and facilitate new product launches. Despite these working capital investments, we repaid $4.8 million of debt during the third quarter and repaid $11.6 million of debt during the first 9 months of fiscal 2016.

I want to go into further detail on our financial position, liquidity and cash flow -- we want to point out that our net debt stands at just $1.5 million at quarter end, down from $7.7 million at June 30th, 2015.

Further, the new $10 million term loan provides significant improvement to our interest rate which was reduced to approximately 4.9% from 8.75% previously. Further, the terms of the new agreement provided an improved amortization schedule with a significant improvement in short-term cash flows.

Finally, the new term loan offers more favorable financial covenants. Now I would like to review guidance. In fiscal 2016, we now expect to generate full-year revenue in the range of $205 million to $210 million compared to our previous guidance range of $195 million to $210 million.

The new guidance range represents an approximate 8% to 10% increase over fiscal year 2015. We're also narrowing our adjusted non-GAAP earnings per diluted share range to between $0.53 and $0.58 from our prior guidance range of $0.50 to $0.60.

We expect our GAAP earnings per share which now reflects the write off of deferred debt transaction costs, to be in the range of $0.38 to $0.43. This is based on an estimated 14.1 million diluted shares. At this point, I'd like to open up the call for questions..

[Operator Instructions]. And we will take our first question from Will Hamilton of Manatuck Hill Partners..

Congrats on the quarter. Just a question on PhysIQ.

I was wondering, Darren, maybe if you could provide a little extra color or how much it represented in the quarter?.

Yes, we've been pleased with the adoption rate of the PhysIQ line. As I mentioned earlier, the third quarter is a wonderful time to launch or to have that type of product, since it is weight loss season. What we're seeing is that PhysIQ is beginning to approach about 10% in our product mix over that period of time.

We expect it to continue to strengthen and be an important part of our product mix in the future..

And then wanted to ask about rank advancements. It's something, I don't know, you've talked about in the past and I understand there was a new Pro 10 that ranked advanced to that level. So maybe you could just update us on some of the key metrics there..

I'm not sure that I have all of the key metrics here for the rank advancements to advance on.

But I would want to point out this, as a strategy within the company over the last quarter and this will be moving forward, what we're trying to do is to focus on ranks within the distributor base that we feel are achievable by the majority of new distributors. This is, we'll call it Pro 3. So a lot of our focus has been on people achieving that rank.

We think that it's a duplicatable rank. With such, we've seen very good advancements at all ranks within the company. On the Pro 10, I'm not sure that we've made a public announcement on that, so I'll hold off on that till we make it official. But we have seen great increases at all levels within the company.

But again, in all of our training, we've been focusing on helping new people achieve the rank of Pro 3 as quickly as possible..

My last question just regards to the Protandim NRF1. Don't want to steal your thunder on your cyber launch, but can you give us any color on pricing, whether you might bundle NRF1 and 2 in terms of a price point there? Any extra color, that would be helpful. Thanks..

We haven't officially announced the price points yet to the field. I don't want to pre-launch it here. It's part of the excitement of our launch in two weeks.

However, obviously we would want to be focusing on selling them as a pack and we do have both Nrf2 as well as NRF1 combined together in a combined package that will be sold to the distributor force. Due to the complementary nature of the two products, they're designed to work together and to be synergistic when used together.

So we're looking forward at really through our training as well as incentives at encouraging and helping the adoption rate of both products being used together as opposed to using one or the other. That's not what will be trained. They're designed to be used in conjunction with each other. .

[Operator Instructions]. And we will take our next question from Steve Martin with Slater..

It was great to see progress at the top line for a change. Can you talk about your expenses and as we go through the next couple of quarters, I know you've had some elevated expense levels for product introductions and R&D and product development.

Can you talk about how you expect these to shake out, not so much next quarter but as we go into next year?.

You'll see that our SG&A expenses, if you look on a year-over-year basis, I think specifically SG&A last year we were at 32.1% of revenue and this year we're at 26.1%. Our focus right now is on that percent of revenue more so than it is on the absolute.

You know truth is going into this fiscal year, you know nearly a year ago the company was on quite a expense reduction trip, right. So, you know everything that we invest in right now is going to have a future pay off. But you know on the near term we're focused on growth.

So, as I look forward, we're going to manage our SG&A expense to a percentage of that revenue.

Frankly, I'd like it to be continually leveraged and I say continually, but to a point obviously and without giving that specific guidance here, we like the 26.1% in the short term because it affords us the growth, affords us to continue to invest as we grow. Hopefully that helps you..

All right and R&D?.

Yes..

Are you bundling that in there or can you talk about R&D as a separate issue?.

We have it bundled in there. We're not talking about it separately. I will say with the launch of the NRF1 product, we're spending a good bit of time and effort and money on researching and supporting that product.

As we come out with it, we've got a good bit of research and we're going to continue to support that product with research along with all of our other products, that's what we do.

So, we're going to make sure that that is a very, very supported product as we go long term with that product and especially in combination with the NRF1 product and Protandim. So hopefully that helps you, but yes we're not laying off of the investment in R&D..

But I assume you would expect to leverage it against sales growth?.

Yes, yes, definitely of course. We're not planning to increase that beyond our percentage availability let's call it..

Okay. Inventory was unusually high. I assume that had something to do with all the product launches, both in the quarter and coming up almost immediately.

What would you say about inventory going forward?.

Well, yes, that's a good point. Look, inventory in Q2, at the end of Q2, we had a few out-of-stocks and the distributor feedback on those out-of-stocks was not positive. So we grew it to ensure that those out-of-stocks were taken care of. Over time, I expect that to come down some.

We have a target of inventory and we're working to improve our system so that our inventory is extremely well tracked and on a daily basis. Right now, it's not necessarily daily reporting on inventory. So we're making sure that our inventory is safe. You mentioned SKU count or expansion of products. Our SKU number has increased, right.

I mean we launched five plus SKUs this year and as everybody knows those new products, when you expand your SKU count, you're going to expand your, at least in the short term, going to expand your inventory.

Especially as we spread those products throughout the world, we've got to make sure that those different markets have enough inventory to get launched and get started with those products. So, you know, our days' supply will go up from that alone. But I expect it to settle down a little bit more over the next--.

Well how about talking about absolute dollars. So you ended the quarter with $17 million of inventory.

Would you expect that as a dollar matter it would go up, down or flat versus increasing sales? Or do you still not have enough inventory to support the growth?.

No, we do. We expect in the near term we expect that to remain flat, right and we have enough to -- I mean part of that, you're right. I mean you're intimating that we've grown some inventory to ensure that we can cover future growth and we have. So I don't expect to have that rise measurably in the short term..

Okay, can you talk about auto replenishment and what the trends on that have been, because that had been deteriorating for a while..

What do you mean order to replenishment?.

Auto replenishment, you know the regular monthly preferred customer--.

Auto ship..

Auto ship, yes..

You know we haven't released numbers on that in quite some time. You know we've made some -- part of some changes that we made to our -- I would say comp plan, but part of some of the requirements we made, we released that distributors from their requirement let's say to have an auto ship, we strongly encourage that.

They typically come in with auto ship's. That's strongly encouraged behavior. But, auto ship without giving you specific numbers outside of the auto ship, auto ship numbers we expect to grow as our distributor count and our PC count grows.

You saw some growth in the distributor count, PC count and you'll see the auto ship and we see internally the auto ship typically follows that. But you know auto ship numbers fluctuate a little bit along with product launches, along with spot orders or product launches. There's spot orders for other promotions that we have, right.

So, auto ship isn't the kind of the end all measurement, I'd say..

Okay and now that you fixed, I will use the word fixed, the capital structure and the debt structure, what's your expect -- you know and the principal payments are nominal going forward, what would be your expectation of use of cash over the next year or two?.

Well, that's a really good question. I'd say at this point, Steve, I'd rather not jump into too much detail about our future plans, but the first things first. We're not really ready to report that, but outside of that we want to grow, right. So we're going to spend our time, efforts and money on growing this business into what it was meant to be.

So, I know that's a little bit vague but I think I'll leave that one at that now..

That will conclude today's question and answer session. At this time, I will turn it back to Darren Jensen for any additional or closing remarks..

Thank you, everyone, for joining us today. As I mentioned before, we're thrilled to have reported the highest quarterly revenue in our company's history. We appreciate your continued interest and loyalty and look forward to speaking and meeting with many of you over the next few months. We wish all of you a great day. Goodbye, everyone..

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