Scott Van Winkle – Managing Director, ICR Darren Jensen – Chief Executive Officer Gary Koos – Interim Chief Financial Officer.

Daniel McGregor – Private Investor Eric Wisenberg – Private Investor Jim Galloway – Galloway Enterprises Steven Martin – Slater.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to today’s LifeVantage Second Quarter Fiscal Year 2017 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, and instructions will be provided at that time for you to queue up.

Hosting today’s conference will be Scott Van Winkle of 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 conference call to discuss results for the second quarter of fiscal 2017. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Gary Koos, Interim 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’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 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 sections of 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 statements. Please note that on 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, February 8, 2017. LifeVantage assumes no obligation to update any forward-looking statements or forward-looking projections that may be made in today’s release or call. Now, I will turn the call over to the Company’s CEO, Darren Jensen..

Thank you Scott and good afternoon everyone. Since we last spoke a couple of months ago we've been busy here at LifeVantage. During the second quarter we generated $48.9 million of revenue, in line with our guidance of $48 million to $49 million and reported adjusted earnings per share of $0.11.

We've also made some changes to our executive team and begun implementing the policies and procedures identified as a result of the recent review.

All the while executing on our strategic plans, these changes reflect our efforts to build a culture environment of accountability and increase transparency ensuring we have a high quality performance driven foundation on which to build our future growth initiatives.

The executive changes including the departure of our Chief Operating Officer followed by our Chief Financial Officer were timed to coincide with external resources we had identified. In operations, we have engaged external consulting support to improve efficiency, and implement more effective practices.

We expect to see positive near term impacts from these efforts. The most apparent to our investors will be reduced inventory levels as reflected in our second quarter balance sheet. We expect to see further inventory reductions over the coming quarters.

I am pleased to introduce Gary Koos, who joined LifeVantage a few weeks ago as our Interim Chief Financial Officer. Gary brings significant experience both as a CFO and in operations across a range of industries, including experience as a public company CFO. You will hear more from Gary later in this call.

We also continue to enhance our international management team. We have previously discussed the additions to the leadership team in Japan and Europe, as well as the Senior Vice President of International reporting directly to me. I'm pleased to announce that we are adding Fiona Ho [ph] to our greater China leadership team this month.

As you are aware we currently operate in Hong Kong and Fiona will immediately focus on Hong Kong finalizing and implementing our new policies and procedures.

However there is a tremendous opportunity in greater China both in Taiwan and in the mainland, the addition of Fiona represents our first steps in building the plan for a broader China opportunity.

Second quarter revenue was in line with the guidance we provided in December and as we thought it was the quarter in which the impact of our audit committee review and the associated disruption to our business was realized. The disruption to sales should moderate as our new policies and procedures are implemented.

During this process there were limitations on certain types of international sales as we discussed last quarter.

As we work to complete the implementation of our new international policies and procedures in Q3 we continue to believe that the third quarter will be our recovery period with additional growth initiatives to follow during the fourth quarter. Let me briefly update you on the rollout of our new international policies and procedures.

We've installed our new policies in Mexico, in Thailand where our business was focused on skin care we have now received approval for our flagship products Protandim Nrf2 and Nrf1. The launch of Protandim over the coming months will serve as our primary remedy in this market.

As local consumers and distributors will now have access to our leading products. In Hong Kong we’re refining our new policies and procedures and they are scheduled to be rolled out soon. This will be one of the first priorities for our new Hong Kong executive Fiona Ho.

Our near term goal is to re-engage our distributor partners and to increase focus on the business following the period of unplanned noise.

As we execute our strategic plan, we have identified some re-branding and repositioning opportunities with enhanced focus on combination promotions to drive efficiency for our distributors that should increase shopping cart size and order frequency. We are building up towards our April convention, where we're excited to announce these initiatives.

Our convention platform is the ideal venue to speak with our distributors and share these new opportunities that we are creating. John Maxwell the highly regarded author speaker and leadership trainer will be joining us at Convention to address our distributors. We expect a very positive response to his leadership training.

To summarize we are putting the right people in the right roles in markets, building a high performance, accountable culture and executing against our strategic plan.

Now let me review the second quarter results in greater detail, as I noted second quarter revenue was in line with the guidance range of $48 million to $49 million that we provided at December. Second quarter revenue was $48.9 million compared to $52 million, a year ago.

We saw a year-over-year declines in both the Americas and in the Pacific, Asia Pacific, and Europe as a result of the disruption associated with the implementation of new policies and procedures. While the new policies and procedures are related to sales in the international markets, the disruptive impact was felt across several markets.

This included some domestic sales for products that were being carried or shipped by our distributors into international markets. Not to mention the impact of negative press surrounding the delayed financial results. As such domestic revenue was impacted as well. Second quarter earnings per diluted share were $0.02 on a GAAP basis.

Adjusted earnings per share were $0.11 versus $0.14 a year ago. Now let me turn the call over to our Interim Chief Financial Officer Gary Koos to provide some additional detail on the financial results. Gary..

Thank you Darren. I appreciate the opportunity to join the team. Good afternoon everyone. During the second quarter of fiscal 2017 we reported $48.9 million of revenue a 5.9% decrease when compared to the prior year period. Revenue in the Americas decreased 6.1% to $37.6 million. And revenue in Asia Pacific and Europe decreased 5.1% to $11.3 million.

Currency was favorable to reported revenue by $1.3 million primarily due to the relative strength of the Japanese yen. The gross profit margin during the quarter was 84.7% versus 84.9% in the prior year period. The modest change was primarily the result of changes in the sales mix and inventory carrying costs.

Commissions and incentive expenses as a percentage of sales were 48.1% down from 52.5% in the prior year period, reflecting the normalization of commissions and incentives as a percentage of sales over the past few quarters.

Operating income for the second quarter of fiscal 2017 was down year-over-year to $0.7 million versus $3 million in the prior year period. Primarily due to $1.7 million of costs associated with the audit committee review $0.1 million of executive severance expenses.

Net of the benefit associated with unvested stock or forfeitures and also the lower revenue relative to our recent quarterly trends.

Operating income in the second quarter of fiscal 2016 included approximately $0.4 million of costs associated with the net executive team transition costs and $0.1 million of administrative costs associated with a reverse stock split in October 2015.

Adjusted EBITDA for the second quarter was $3.9 million compared to $4.5 million in the prior year period. During the first quarter of fiscal 2017, net income was $0.3 million or $0.02 per diluted share compared to reported net income of $1.6 million or $0.11 per share in the prior year period.

On an adjusted basis, which excludes the aforementioned costs, net of tax second quarter net income was $1.6 million or $0.11 per share versus $1.9 million or $0.14 per fully diluted share in the prior year period. We ended the second quarter of fiscal 2017 with $11.7 million of cash and $8.4 million of debt.

Inventory levels declined approximately $2.5 million during the quarter to $21.4 million, and we expect to continue to work down our inventory levels in Q3 and future quarters. We generated $2.2 million of cash from operations during Q2 or $2.1 million of free cash flow after taking into account modest level of CapEx.

Now let me turn the call back to Darren..

Thank you Gary. In closing I would like to reiterate our fiscal 2017 guidance. In fiscal 2017 we continued to expect to generate full-year revenue in the range of $207 million to $212 million. We anticipate fiscal 2017, adjusted earnings per diluted share in a range of $0.40 to $0.47.

Our fiscal 2017 adjusted EPS guidance excludes significant costs associated with the audit committee review and any potential additional non-operating adjustments. Including these items, we estimate fiscal 2017 GAAP EPS of $0.26 to $0.33.

As I noted we expected to take a hit during the second quarter as our policies and procedures were implemented, given the temporary disruption to cross borders sales. We view the third quarter as our recovery period, and are focused on driving distributor and customer engagement.

We will be focused on additional growth initiatives during Q4 and remain confident with the significant opportunities that lie ahead. Thank you for your continued support and interest in LifeVantage. I encourage you to join us on February 16, for our annual meeting. I would now like to open up the call for questions..

Thank you. [Operator Instructions] And we'll take our first question from a Daniel McGregor a Private Investor..

Hello gentleman, thanks for the call today.

I simply wanted to have some kind of an indication if any you can provide about what the status is of pending shareholder lawsuits and how that might affect earnings or distract from your ability to concentrate on the task at hand of operating the business and anything you can share about that would be appreciated. Thank you..

Thank you Daniel, this is Darren. We just addressed a little bit of that, first any time that there is a law suit and part of your question was will it distract from our ability to I would see you carry out our strategic plan. I think is, what you're getting at hand. Now I think that our legal department here at the Company is exceptional.

The law firms that we use are exceptional and I think we have the ability to compartmentalise that and not distract us from our overall goal, which is to engage our distributors and drive the business forward. And that's what we're going to do. Now specifically any comments on those ongoing legal matters there.

I'm not at liberty to comment on that right now. But thank you for the questions..

And we will take our next question from Eric Wisenberg a Private Investor..

Hello, can you hear me alright?.

I can Eric..

I'm just, I'm looking at the numbers and see a $1.3 million in net executive severance expenses and I have two questions.

One is, are there any more of those coming or that number can get bigger?.

As I said I’d like there's going to be a series of questions so I was pausing there for a minute Eric. I have no plans. So there's no plans that I'm aware of to make any additional changes..

Okay and secondly, I was curious to see in the proxy materials that were bringing on three additional Directors, new Directors and I think Mr. Toole is standing for election for the first time. And I'm wondering.

Is it really necessary to add three additional Directors, when we're looking at a Company that does $200 million in sales and the total value is like $80 million.

Do we really want to tie on that much more expense?.

Thank you. Eric a good question. Let me first begin by saying. Let me just make a comment overall on the Board. Throughout my career, the last 27 years or so I must say that this Board is the best Board that I've worked with. They are absolutely dedicated to the success of this Company and I hold each member at the highest – in the highest regard.

And I believe that each member has a critical skill sets and expertise that are necessary for our success. And as we look at bringing on additional skill sets or additional members and I mean if we go and look at these three of the three gentlemen that are up for vote to come onto the board.

I mean they are superstars in very specific areas in which we lack. I mean if you look at Mr. Vinayak Hegde. I mean he is the Senior Vice President and Global Chief Marketing Officer for Groupon. And that is one of our targets to be more technical and advanced and really focus on this gig economy, you look at Mr.

Greer, Ray Greer, he is one of the world leading experts in Logistics in the way that products move in this new U economy and then Darwin Lewis who's the Senior Vice President in Global Sales and Chief Customer Officer of one of the largest consumer packaged goods company S. C. Johnson.

I mean the skills that each one of them bring in I believe are critical. So it's always a cost benefit analysis.

That we look at in making additions to the Board and really the potential upside for the specific skills that each of these members bring in and coupling that with the specific skill sets that each member of our current board has I believe positions us for future growth and expansion. And so the upside is tremendous.

Of course there is a cost associated with it, but the upside is incredible..

Okay and my third and final question is I'm sure you know that your stock hit a new 52-week low today of $6.03, which is well under a dollar on the pre-split shares and there are those who say the CEO's scorecard or report card at the end of the day is the performance of his stock.

Would you have any comment to the stockholders, who are looking at such an incredibly bad stock price or do you have comments on it?.

Well I mean looking at it specifically today and over the last few days, where you've seen somewhat of a drop. I think much of it as I’d look at the sector is there is some effect overall on the sector with USANA’s recent comments that they've made and some of the challenges that they announced.

I think it may have had more of an effect overall within the industry. I do realize that my scorecard is the stock price and I mean there's several metrics that I'm judged by and I take it very seriously.

So course I'm – my goal is to bring stockholder value and return on investment, that's what I'm focused on is shareholder value is number one here and we'll continue to strive to drive that price up..

Thank you..

Thank you..

[Operator Instructions] And we will take our next question from Jim Galloway of Galloway Enterprises..

Thank you for taking my call. The product offering is broadened in recent years but I like you to explain how and if the new products are complementary and whether we're cross selling. I would have thought that the addition of products would have increased our overall revenue but we're flat.

and so I don't know if we’re able to convert Nrf2 buyers and persuade them also to take Nrf1, can you give me some help on that?.

Yeah thank you. We have extended or expanded the product offering for sure. And there's reasons behind that, I mean one in order to drive top line sales obviously one of the levers that I have that I can pull, is to broaden the product line, to attract a bigger share of the customer pie.

And each of those products that we've launched have become important parts of our product line.

If you look at for instance one of the most recent products that we released was Nrf1, one of the targets that or one of the goals that we had for that product was to overall increase the average shopping cart basket size, because many of our people are as you mentioned, focused on the Nrf2 product.

And so in order to broaden that story really we are a nutrigenomics company and that's what our products are based on. Is that new science of nutrigenomics, so that's what, anything that we do will be part of that will be part of that story.

So how do you, how do you get people to, how do you get the penetration rate of those new products into your distributor force. And that's what we continue working on.

For instance I was just talking about the Nrf1, for the most part that product has only been involved and has only been available in the United States where it has immediately become one of them, one of our largest product lines.

And we don't give out the specifics but it does represent a double digit value or percentage of our total product mix or product sales. So it has become an important part. We just recently launched that product.

Officially we had a pre-release going in December in Japan but that product now towards the end of January officially became available in Japan. And as I mentioned in my prepared remarks that, that products also become available in Thailand.

So it's beginning to spread out and I believe as it spreads out it will even become more of an important part of our product line. So I believe that your comment is you thought, it would drive the top line more. We did see some top line growth because originally, when I came in 20 months or so ago that the inertia was down.

When it came to top line revenue not up and I think we've been able to turn that around. And I think other factors have more been the cause of flattening of the overall top line as opposed to the inability to integrate these product into the overall story of the Company..

Okay, I have two more questions. .

Sure.

Second one is about international expansion. And I'm wondering what your formula is for the timeframes to achieve positive cash flow and profitability in the future in recently entered countries.

How much are we spending and is that falling in the R&D line or where?.

I’d have to have Gary say exactly which line it’s coming under. But here's the overall philosophy and the strategy. You drive it – you go into a market and you try to keep I try to keep as many of the expenses on a variable standpoint as opposed to a fixed.

You keep the overhead low go in with as little overhead as you can because typically it's a slow start.

You don't want to go in with a massive, with a massive amount of cost at the very front so most of our expansions into these market have been really using third party logistics companies and keeping minimal staff at all in those areas, until we see more growth.

So again keeping the costs low and the line item I believe that those are coming in is just through SG&A..

Okay, my last question it came as me, as a surprise to see the decline in the number of preferred customers because I know that you've put a stress on having customers as well as distributors.

Can you explain, why you think the number of preferred customers is going down both in Asia and in the United States?.

Part of that is looking at the way that, that we classify these people and with – I would say some of our policy changes too. If people were preferred customers, or somehow were receiving product that was not in these areas and had signed up as a customer, we stopped their ability to order products in a different market.

So I think you'll see from some of our policies that we implemented that, that may have been part of the reason why there was a flattening or a decline in some of those customers..

And I was hoping to see some of them become distributors but not. Thank you for answering my questions and good luck..

Thank you very much Jim..

And we'll take our next question from this Steven Martin of Slater..

Hi there guys..

Hi Steve..

You know I’ve been obsessed about inventory, can you give us some idea of what the current composition of the inventory is and how – what’s the timing on the expected reduction..

Yeah, let me you know what I’ll have Gary our new Interim CFO answer those, Gary you want to take that question..

Sure. Steve that’s a good question. So I've been here a few weeks and certainly one of the things that I've been focused on, initially is to look at the inventory situation with the overall effort to bring it down. So the answer to your question, you know first of all our total inventory of $21 million is roughly 50/50 between raw and finished goods.

And so the first effort we've been making is to look at the raw material and basically to take a very aggressive approach to cut off the spigot and not receive any more materials in because we have already a surplus of that.

The other part that I've been looking at is to make sure that I understand and the team understands what root causes of the initial breakdown occurred that basically got us into this inventory situation. So it's been involved and basically looking at the root cause.

Make sure that we take a very aggressive approach on our PO cancellations and we're even taking more aggressive approach to reduce our raw material. Does that answer your question Steve..

Well, not quite. So do you have a target, you’ve reduced it – a couple, I don't have in front of me how much you reduced it in the quarter but do you have some sort of quarterly target on what how that inventory should come down. Second do you have some number that you are shooting for and how long do you think it's going to take to get there..

So Steve, I think that we've previously stated that we want to get to $17 million target by the end of June which is our fiscal year. So that – we are still holding to that target and obviously we want to shoot for our lower number but we believe that's realistic..

Okay, so you're going to go from $21.4 million to $17 million, which is about $4.5 million.

Should we expect that, that is 50/50 in each quarter? Is it going to be more backend loaded?.

I would say it's probably about 50/50. Steve. And a lot of it depends on some of the initiatives, where we’ve ticked up and how successful those are but right now I would say 50/50..

Okay and I want to echo the comment of an earlier, I should've said this first one of the earlier callers. I too – Darren when you told me about the new board members I applauded it. I thought they added a whole lot of value. I guess I was disappointed when I finally read the proxy to discover they were being added not replacing.

I don't think a Company of $100 million in market cap and $200 million in sales requires 9 directors. So I will move on from there.

Should I presume all the extra costs came out of SG&A or were included in SG&A?.

I'm sorry Steve could you repeat that question..

The extra costs, the $1.8 million in this quarter and $500,000 in the comparable quarter last year, should I assume those are all in SG&A..

Yes they are Steve..

Okay, and I know you don't break it out in the press release. What can you give me some idea of what the R&D looked like in the two quarters this year and last year..

Steve I don't have those numbers broken out between R&D and the rest of the group. We're just looking at [indiscernible] quick, one second. Yeah. So if I was to look at the 6-months ended December 2016 – about $0.6 million of R&D costs and the comparable period a year ago was $0.5. So it's roughly fired at $0.6 million..

Wait, $5 million or.

$0.5, so $500,000 a year ago and $600,000 this year..

Gotcha. Okay and the commission and incentives, which are down, we're down to 48% this quarter.

Is that a good number for going forward?.

Steve this is Darren, let me answer that. Our target is 48%. And as you know and we've discussed I think you and I have, you’ve posed this question before and we've discussed it on previous calls.

That number has been drifting up, I think one of our highs was in the 52 range and one of our targets we talked about in previous quarters was bringing that back down to our target of 48%. So you've seen that we've made tremendous progress in getting there..

Right. Should I presume now that you're there that, that's a good number for going forward..

Yes that is always our target..

Because I applauded, since I didn't expect it to get there quite this quickly..

Well we're pretty efficient Steve and we try to get there quickly but yes, that's our target and obviously that's what we're trying to stay at, is 48..

Okay, now we spent a lot of time talking about this down in Florida. Now that you're sort of past – and you’ve talked about it we’ll just a couple minutes ago.

When do you think is it this quarter or the fourth quarter, that you will be back selling to all the people you want to sell to, and selling into all the markets you want to be back into with all the products you want to be selling? In other words when are you going to be back on the same basis as the June quarter, this past June quarter when the numbers came in really strong..

You know as I, as I stated I think in December and in our December call that this quarter the third quarter is more of our recovery period, we move into fourth quarter where we really are getting kicked up into that quarter with our global convention, which is a major driver, where a lot of our initiatives will be announced.

That's where I see business picking up even a lot more and we're moving back into that growth cycle. So the initiatives as I mentioned in my prepared remarks. We've rolled those out to most countries or they're scheduled to be implemented into countries. So you know most of it, a lot of it I should say will be coming back.

But there is a certain percentage of it that we don't want back because it was based on behaviors that we don't allow. But now the key part is that we have parameters in policies in place to govern, to govern that behavior as well as to accurately describe that to our distributors.

So they know how to act and build their businesses and I think as long as they understand the guidelines they are, they are experts at maximizing the return on their investment. And so I see them being very successful within these new policies..

Right, so that, by the end of the third quarter are you going to be recognizing, you still have disruptions in your distributor base. Are you at that place where you've sort of done all the paper work you had to do. You're selling to pretty much everybody.

You want to sell to and I don't know how to ask this question but you told us that you would turn some people and some countries and some markets off. Will those all be turned back on by the end of the third quarter..

Yes As I mentioned in my prepared remarks, that some are already implemented. Others are scheduled to roll new product introductions out of our key products into some markets that begin at the end of March and others are in the very final stages. For instance I mentioned Hong Kong with the addition of Fiona Ho. She's in town next week for training.

So her top priority going back is to begin the implementation and roll out those new polices. So by fourth quarter I don't see a reason why we wouldn't be fully engaged with everything rolled out..

Okay, thank you very much..

Thank you very much..

[Operator Instructions] And there are no further phone questions at this time..

Thank you everyone for joining us today. We appreciate your interest in continued support and have a wonderful day. Thank you..

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