Scott Van Winkle - Managing Director, ICR Darren Jensen - Chief Executive Officer Steve Fife - Chief Financial Officer.

Jim Galloway - Private Investor Steven Martin - Slater Eric Wisenberg - Private Investor Brian Brothers - Private Investor.

Good day, ladies and gentlemen. And thank you for standing by. Welcome to today’s Conferece Call to discuss LifeVantage's Third Quarter 2017 Financial Results. At this time, all participants are in a listen only mode.

Following the formal remarks, we will conduct a question- and- answer session, and 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, Kamel. So good afternoon, ladies and gentlemen. Welcome to LifeVantage Corporation’s conference call to discuss results for the third quarter of fiscal 2017. On the call today from LifeVantage with prepared remarks are Darren Jensen, Chief Executive Officer; and Steve Fife, 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 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 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, May 10, 2017. LifeVantage assumes no obligation to update any forward-looking projections that may be made in today’s release or call. Now, I'd like to turn the call over to the Company’s CEO, Darren Jensen..

Thank you, Scott. And good afternoon, everyone. It's a privilege to speak with you today. During the third quarter we generated $45 million of revenue and recorded adjusted non-GAAP earnings per share of $0.02. While these results did not meet expectations, I am pleased with how we ended the quarter and how we begun the fourth quarter.

As you know, our growth was interrupted earlier this fiscal year and we needed to implement new international policies and procedures before the trajectory of sales could really change.

As you recall last quarter, I stated that Q3 would be our recovery period .We saw the leading indicators of this recovery materialize in February, and the revenue improvement began in March. We've now substantially completed implementing the new international policies and procedures.

Although we would have preferred to see the recovery materialize earlier in the quarter than it did, we are pleased that month -over-month sales growth has begun. In simple terms, we believe that we are on the upward side of the trough and are returning to a growth phase in our business.

We further enhanced our executive team during the quarter with the addition of Chuck Wach, Chief Operating Officer and Steve Fife, Chief Financial Officer. Chuck is an accomplished leader with operations experience in nutritional supplement, direct selling, online retail and global food and beverage industries.

We've already put his experience to use to improve efficiency and implement more effective practices. One of Chuck's first projects has been inventory management, building the system and processes to enhance demand planning to better manage inventory.

We made progress in reducing the amount of our inventory during the third quarter, which declined $2.2 million from the second quarter level and continue to expect further reductions during the fourth quarter. I am also pleased to introduce Steve Fife, who joined LifeVantage as our Chief Financial Officer in March.

Not only does he have substantial public company experience, he brings a diverse financial perspective with experience with high growth company and cost saving initiatives. In addition to significant international experience including a focus on Asia.

Steve will discuss his priorities later in the call and I am excited to add his leadership to our executive team. With these enhancements to our management team, I am confident we have the leadership in place to effectively execute our strategic goals. Grow the business and enhance shareholder value. Let me update you on our strategic growth plan.

In the third quarter, we made significant progress in all four of our strategic areas of focus. Our first area of focus is to more effectively engage our distributors and customers. At our global convention in April, we awarded the first of our new executive master ranks.

We launched the loyalty program and we introduced new branding designs to improve the presentation of product and information with more duplicatable messaging that is easier for the average distributor and customer to understand. We also introduced new product bundle that combine complimentary products into packages that includes free shipping.

We believe that this new offering will benefit our consumers with greater value and broaden their exposure to our product offering, while growing an average order size with our subscription model. For example, our average subscription order averages about $85. And in addition the consumer has to pay shipping.

Now beginning at a $120, the consumer can get a bundle of -- our product bundle that includes free shipping. We anticipate that many of our consumers will purchase these bundles rather than individual items. And thus increase over time our average subscription order.

Although seemingly small addition to our product offering, I feel that this bundling strategy will play a major role in the future success of the company. Our TrueScience skincare line was also bundled and our branding and packaging was updated, making the package size TSA compliant. We also rebranded our K9 health products as Petandim for dog.

Our second are of focus is to compete globally within the new economy. We continue to execute on a global expansion initiative and our plans to further leverage our international operations into Europe, Mainland China and Taiwan. We are targeting Germany as our next likely market opening.

We'll have more to say on the significant opportunities over the coming months. Our third focus is to relentlessly pursue science based nutrigenomic products. And the research to back them.

We are continuing the global rollout of core product line with the release in March of Protandim Nrf2 in Thailand, providing local consumers and distributors' access to our leading product. Pre sales of Nrf2 in Thailand were very strong leading to a record month net market. And we'll be followed by a big event in June.

In Japan, we completed the rollout of our Protandim NRF1 during the quarter. Finally, our focus to create frictionless customer and distributor experiences was addressed with our efforts to simplify our enrollment and ordering processes and to deliver a combined set of mobile app to further simplify interactions with LifeVantage.

We combined three of our mobile apps along with our replicated website service into one solution which we call the full tax app and added tax spot capability to make the app experience easier and more robust for our customers.

At our global convention, distributors had the opportunity to train with all the app and qualify for a giveaway upon completion of the training. The new offering and technical training was well received.

The convention was a success and we anticipate renewed distributor commitment and excitement from the event and our new product update bundle and two introductions. We've gone through an extended period where our advanced schedule was not optimized.

Our most recent event was space too far apart and as we've previously reported the prior major event was disrupted by a hurricane. We now have our event schedule plan to support a high level of engagement with our sales and customer base. Before I turn my attention to the third quarter results, I want to comment on a recent news event.

We received an FDA warning a few weeks ago alleging that information on our website contain impermissible drug claims relating to our Protandim Nrf2 Synergizer product. The FDA sent warning letters to 14 companies that same week. We were obviously surprised to receive this letter and believe we should not have been included in the sweep by the FDA.

In its letter the FDA cited statements made on the Nrf2 science. COM site which is a non promotional informational website represent scientific research on the Nrf2 protein and its associated pathway. This website does not once mention a product by name or lead to our product or corporate website.

We pride ourselves on our science based approach to product development. LifeVantage does not claim that any of our products prevent diagnose, treat or cure cancer or any other disease in any of our marketing materials or labeling.

We proactively and consistently engage distinguish FDA experts to ensure our promotional materials and website adheres to FDA regulation. We responded promptly to the FDA and will continue the dialogue. Now let me review the third quarter revenue. As I already mentioned, we expected the third quarter to be a recovery period.

While the recovery occurred later in the quarter than we had hoped, we did see the turn during the period and enjoyed strong March that is now carried over into April. Third quarter revenue was $45 million compared to $56.2 million in year ago, which was our highest quarterly revenue in history.

We saw year-over-year declines in both the Americas and in Asia Pacific and Europe as a result of the disruptions associated with the implementation of new policies and procedures. Additionally, we implemented some changes to stay ahead of the evolving regulatory environment that have negatively impacted our sales.

Essentially we removed prior incentives that have been used in the past to support a higher average initial orders size. While this change did not affect the number of orders, new customers or distributors, our initial order size is now less than what it was a year ago. We estimate this impacted our sales by $1 million to $2 million this quarter.

We've implemented programs and training to bolster the value of larger enrollment packages. And we began to see the return back to our historical enrollment mix. I am pleased to see that our recently implemented programs are having a positive impact. I'll now turn it over to Steve to run through the financials in detail and introduce his priority.

Steve?.

Thank you, Darren. And good afternoon, everyone. I am excited to join the team. And I am enjoying the vibrant culture here at LifeVantage. I also enjoyed the opportunity to meet many of our distributors at the global convention a few weeks ago.

As Darren mentioned, we reported $45 million of revenue for the third quarter of fiscal 2017, a 19.9% decrease when compared to the prior year period. Revenues in the Americas decreased 21.9% to $34.4 million and revenues in Asia Pacific and Europe decreased 12.5% to $10.6 million. Currency had a de minimus positive impact of 0.2% on a quarter.

The gross margin during the quarter was 81.7% versus 82.7% in the prior year period. This change was primarily the result of sales mix and higher inventory carrying cost. Commissions and incentive expenses as a percentage of sales were 50.8% compared to 50.2% in the prior year period.

As we've indicated in the past, our target range for commissions and incentive is 48%. Fluctuations from this target are driven by the timing of incentives and where they fall on the promotion calendar. SG&A as a percentage of sales rose to 30.5% from 26.1% a year ago.

On an adjusted basis, excluding $0.6 million of executive severance, recruiting and transition costs and $0.1 million of class action litigation expenses, SG&A as a percentage of sales rose to 28.8% from 25.8% a year ago. The prior year adjusted SG&A excluded $0.1 million of executive severance, recruiting and transition costs.

Operating income for the third quarter of fiscal 2017 was down year-over-year to $0.2 million, versus $3.6 million in the prior year period. Given the lower revenue and the fact that we have an expense infrastructure built to drive a higher level of revenue, we encountered significant deleveraging in our SG&A expenses.

While we expect that Q4 SG&A will remain elevated as a result of the cost associated with our global convention that occurred in April, we will focus on reducing cost to better leverage our revenue growth in the future. Adjusted EBITDA for the third quarter was $1.6 million, compared to $5.1 million in the prior year period.

During the third quarter of fiscal 2017, net income was $0.1 million and breakeven compared to net income of $1 million or $0.07 per fully diluted share in the prior year period.

On an adjusted basis which excludes the aforementioned cost, net of tax, third quarter net income was $0.4 million or $0.02 per fully diluted share versus $2 million, or $0.14 per fully diluted share in the prior year period. We ended the third quarter of fiscal 2017 with $9.2 million of cash and $7.9 million of debt.

Inventory levels declined approximately $2.2 million during the quarter to $19.1 million. We continue to be on target to achieve our goal of reducing inventory to roughly $17 million by fiscal year end. We continually evaluate the shelf life of our raw materials and see minimal risk of spoilage.

We generated $4.6 million of cash from operations during the first nine months of fiscal year 2017, and $4.2 million of free cash flow after considering our modest level of year-to-date CapEx. Now turning to guidance. I'd like to provide our outlook for the fourth quarter of fiscal 2017.

We expect to generate fourth quarter revenue in the range of $51 million to $54 million. And adjusted earnings per diluted share in the range of $0.05 to $0.08. Our fourth quarter adjusted EPS guidance excludes any potential non-operating one time expense.

Let me close by saying I see tremendous opportunities of LifeVantage including both product and geographical growth opportunities. Our international expansion potential is quite obvious. But I really believe we also have an under penetrated domestic market. To give you a quick view of my near-term priorities I've identified since joining the company.

My plan is quite simple. To leverage future growth into more robust earnings and cash flow. We will work to improve processes to achieve our goals and upgrade systems where require.

I also look forward to improving our interactions with investors and think that we can better enhance and applying the core drivers of our growth to improve shareholder value. With that let me turn the call back to Darren..

Thank you, Steve. I want to again highlight that we had a successful global convention in April that allowed us to reengage our distributors, rollout significant new products and technology solutions and update our distributors on our latest initiative.

John Maxwell, the highly regarded author, speaker and leadership trainer joined us and was met by a very positive response to its leadership training. Finally, as noted previously we believe the third quarter was the start of our recovery period and we are further encouraged by the start of the fourth quarter.

We will continue to focus our efforts on driving distributor and customer engagement. We will remain vigilant on executing our strategic growth plan and are optimistic about the significant opportunities that lie ahead. Thank you for your continued support and interest in LifeVantage. I'd now like to open up the call to questions. .

[Operator Instructions] Our first question is from Jim Galloway of Private Investor. .

Thank you for taking my call. I was at the convention and was very impressed the way it was conducted and the information provided. For about the last four years, I've asked about retention programs. And I've not been satisfied and I am very disappointed in the continuing reduction in active distributors and preferred customers.

I saw that there is a loyalty program started but I am not sure that that's enough. You really think that's sufficient for retention..

Thank you, Jim. I mean is sufficient for retention. What are the main drivers in retention that we see? Basically we look at what I call first dollar principle is getting money into people's pant as quickly as possible. And that drives retention, as well as getting them to specific ranks.

If they are at pro 3, the retention with the company is for very long period of time. So in addition to that loyalty program which I think will be very effective. We've also combined that with several other programs including the promotion where we extended the rank for the rank advancement for the pro 3s and pro 5.

This has been one of the best promotions that we've run. And the ranks at pro 3 and pro 5 we get some of our best retentions. So I think combining multiple areas into driving retention that it does become very effective. So --.

I am thinking a lot on the preferred customers too because there is not even good communications with preferred customer. .

Well, the preferred customer is what we see is from a retention standpoint the majority of the drop off occurs between their first order and the next order. That drop off is what we are trying to address with the loyalty program. So typically if once they cross between zero and one, the drop off is single digit.

But it's a larger drop off, a quite large drop off in that time between zero and one. And that's where this loyalty program is specifically targeted for. And that's why we are hoping that it will be very effective. .

Okay. One more question. Again, I compliment you on the tools that you have provided to distributors. It's -- there is never been a better time to be a distributor. .

I agree. .

But we are missing the secret sauce. There is got to be something that really motivates people forward. And I am not putting my finger on that.

What are you thinking is the secret sauce that you are going to add?.

Well, the secret sauce, I am not sure if they are big secrets that are out there.

One of the things that I think will have one of the major effects on the overall business will be -- and I said earlier in my prepared remarks that although seemingly small this bundling strategy that we have, I think will become a powerful force to moving the company forward. Also retention as well as for product usage.

Being able -- one of the biggest request that we receive at the company has been for free shipping. So by combining some of our top products into groupings or bundles and offering free shipping with those, we were averaging more or less around $85 per order ship. And now the smaller bundle begins at a $120.

If we can get people onto -- as people begin to adopt these bundling strategies or product, I think that will drive the business forward quite a bit. .

Thank you. One last question. When you came on board, you had a program where you were bringing potential heavy hitter new distributor into the office and trying to recruit teams.

Is that program still underway and are we successful in bringing over large groups of individuals as a distributor?.

Thank you for that question, Jim. The program that you are referring to is what we call red carpet program. And we ran a test -- we had a test market on that or test strategy on that last year and it seems to have performed very well. Our goal is never to bring over large groupings of distributors. What we target is leadership.

People who are out there actively looking for the next opportunity that need certain requirement that has been in a leadership position with other company. And that program is now in effect and is operating so it's functioning. We restarted that a couple of months ago. And we did make some modifications to it.

I think too based of our test market we refined it to make it more efficient and I believe that can have an impact on us in the future. So thank you Jim for your questions..

Our next question comes from Steven Martin with Slater..

Hi, there. So when you look out to your guidance for next quarter, your sales are sort of comparable to last year and but the earnings are significantly less. And I understand you have the added expense of the convention.

What else accounts that can be the entire difference?.

Yes. Steve, this is Steve Fife. It really is. The convention that we put on they are not cheap. They cost us a lot of money. We believe that the kind of ROI on done is very beneficial to the company both in the short term and the long term. And what we do with these events is we do accumulate the cost during the months prior to the build up of that.

And then in the quarter that the event takes place, all of those costs and also the associated revenue that we generate both from ticket sales, product sales, flag sales that are realized during the time at convention is also realized all in the month of that convention.

So we get a revenue pot in that month but there is also the cost associated with putting it on to get in that quarter or in that month. And they are significant costs. So that really the driver for the increase in the cost year-over-year when you look at Q4 versus the prior year period. .

Okay. When you look out beyond that when should we expect that sales and profitability are going to be positive on a year-over-year basis? So your sales are close in Q4, when you get out -- I know last year Q1 was a monster quarter. So when do you expect that we are going to see year-over-year improvement. .

Well, it's not to be difficult here but to some degree that the timing of these events because of the cost associated with and again there is kind of lumpiness to our SG&A because of that.

And so depending on the sequence of when the last event took place, I don't know that we'll always see year-over-year improvement because of the timing of when those events might occur. .

We know when those events are going to occur going forward.

So my question was when do you expect that we are going to be year-over-year positive in revenues and year-over-year positive in earnings even if it's separate quarters? Because if you have a mismatch in one quarter where you have more expense likewise you should have a reversal of that in the preceding or subsequent quarter. .

That's right. That's right. And I totally understand your question and we are not -- we haven't and we'll not provide guidance for 2018 until our next call. But I fully expect that we will see profitability on a quarterly basis in 2018.

And the timing of the year-over-year improvement will be driven largely by events in 2018 as well as the events that we had in 2017. .

Okay. Let's go back to inventory. It is coming down but it's not really coming down as fast as I'd have expected.

Can you comment on the trajectory and when did -- what do you think is the optimal level of inventory and when do you think you are going to get that?.

Yes. So I mean there are a lot of things that have gone in the last five weeks since Chuck and I have been here. We spent a fair amount of time looking at our inventory. And the reality is when you look at our total inventory level versus our cost, we have about $8 million in cost.

And a majority of that is product related cost but then we also have warehousing and distribution cost. So our monthly material cost is something that much lower than even an $8 million. And to push through a lot of inventory when that is our quarterly material cost, it's a challenge.

Now we looked at the inventory that we have on hand about half of it is raw material. It is virtually all material that is tied to our flagship products. So the risk have also lessens is frankly is nil and we've also -- I commented that the risk of spoilage is very, very small.

So on a long term basis we know that we are going to work through that inventory. We've also explored the opportunity or the ability to sell this inventory into a secondary market. And right now the responses that we are getting on that, these financially don't make sense for us to do that. The discount associated with it is too great.

So our inventory turn for the last several years actually had been hovering around 2x. We got a relatively short-term target to get to 3 and longer term we think our churns can get to the 4x level but that's going to require some changes in our current logistic and supply chain factors.

Chuck identified a lot of opportunities here and we are starting to kick those off but you just can't throw those things within a week or a month. It takes time to work with our suppliers and changing that supply chain model. .

All right. Turning to SG&A. I recognized that in the fourth quarter it's going to go up significantly because of the convention. You reduced it modestly in the third quarter and I recognized that you guys haven't been there very long.

Can you give us an idea of 37 that you spend this year and it has some extraordinary one time items? What do you guestimate is the run rate axing out one time items in the convention of SG&A going forward?.

As -- we will probably provide -- not probably, we will provide more guidance around that in 2018. One of the things that we are doing is developing what we think a target model is. And we stated that from a commissions and incentives standpoint, our target is 48% of revenue. We are also kind of pruning in on what our margins and SG&A should be.

And I'd plan on communicating that more fully as we announce our thoughts better in 2018 guidance. .

Our next question comes from Eric Wisenberg of Private Investor. .

Yes, hi. I'd like to have a little more color or information about the class action lawsuit. You indicated expenses so far roughly a $100,000.

I'd like to find out more about what those suits are asserting and obviously a year ago roughly the stock was trading over $15 a share, today it is hitting new lows almost everyday new 52 week lows, I think including today and obviously a little over $4 a share.

So is that the bulk of what the lawsuit are about or is there more you can tell us?.

The bulk of the lawsuits in first -- on this I am not an attorney so I'll try to explain the best that I can. Basically there are two different lawsuits that are out there. There is a class action and then there is a shareholder derivative suit. Basically they are kind of tied together with each other.

Where we are at in the process is that thus far as a company LifeVantage is filed the motion to dismiss and to reply. If the motion is granted then the shareholder derivative action will likely be dismissed as claims are substantially based on the claims on the class action suit.

So really basically these suits originated within -- it seems like within minutes or hours of us filing late on one of our previous quarter. So when we filed our 10-K late. So basically lot from a boiler plate as far as I can tell again I am not an attorney.

These are very common that come out when you file late and right now we are in the process as I said to filing motions to have them dismissed. .

Okay. And can you give us any hope that the decline in the stock from $15 to $4 and change can reverse any time soon? I know you are not an analyst but you are in-charge of a company which has had horrible stock price performance.

Can you give us any hope of improvement?.

Well, Eric, as I am a shareholder also. I am also equally is disappointed with the share price performance. And we are looking to drive the business to drive the stock. I mean ultimately the revenue is what's going to drive the price of stock.

And the last couple of quarters for us have been kind of rough with some of the challenges that we've experienced. And as I said in my prepared remarks we are on the backside of that trough.

As you can see with the numbers that we are indicating for Q4 that we are going to be between $51 million and $54 million which puts us back into the pre-disruption range and we see us moving back into growth. And I think as we move back into growth that's naturally going to drive the top line of the stock. .

Our next question comes from Brian Brothers of Private Investor. .

Well, gentlemen. So I appreciate the information on the call here.

My question as I understand how the profession in this industry works, everything is all going to hinge on recruitment of new sales reps, so is there anyway to get a little transparency of visibility I should say on the trending of -- I understand year-over-year quarters that are being asked about right now but more important to me is the quarter-over-quarter so just in the last quarter or two, how is the recruiting numbers looking?.

Well, obviously with -- over the last couple of quarters there was a disruption in the business. And within the business a distracted distributor is a paralyzed distributor. And it makes its effort to recruit. Now over the last several months continuing into this quarter, we've seen some pretty strong recruitment levels coming back.

As a matter of fact when you look at our total coming in where we combined both retail people coming in, PCs as well as distributors. They have been doing better than what I have seen on the previous months going back as far as might Chuck can go. So where I am looking at is not necessarily on previous quarters. I am looking at what's occurring today.

And I am saying what's occurred beginning and those were some of the leading indicators that I talked about in February that we began to see. That was one of the leading indicators where we thought shift in the business and there began to be more recruitment.

That really began to materialize a lot more in March and then further materializing going into this quarter. So it's moving on a very positive trend right now. .

Right. I truly believe that obviously sales follows recruitment and as those numbers are in a positive trajectory right now as you said in recent history, that's very promising to me. I appreciate your insights guys. .

Okay. That does conclude our question-and-answer session. I'd like to turn the call back over to Darren Jensen for closing remarks. .

Thank you everyone for joining us today. We appreciate your interest and your continued support. And we wish you all wonderful day. Thank you. .

Once again that does conclude today's call. We appreciate your participation..