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Lifevantage Corporation (NASDAQ:LFVN)

F2Q13 Earnings Call

February 7, 2013 4:30 PM ET

Executives

John Mills – IR

Doug Robinson – President and CEO

Dave Colbert – CFO

Bob Urban – COO

Analysts

Justin Ruiss – Sidoti

Si Timbermann – Astron Capital

David Rothman – Phoenix Capital

Jim Galloway – Galloway Enterprises

Operator

Good day and welcome to today’s LifeVantage Second Quarter Fiscal 2013 Conference Call. Today’s conference is being recorded. At this time, it’s my pleasure to turn the conference over to your host for today’s call, John Mills of ICR. You may begin.

John Mills

Thank you. Good afternoon ladies and gentlemen, and welcome to LifeVantage Corporation’s fiscal second quarter 2013 conference call. On the call today from LifeVantage are Doug Robinson, President and Chief Executive Officer; Dave Colbert, Chief Financial Officer and Bob Urban, Chief Operating Officer.

By now everyone should have access to the earnings release which went out this afternoon at approximately 4.00 PM Eastern Time. If you have not received a release, it is available on the Investor Relations portion of LifeVantage’s website at lifevantage.com. This call is being webcast and a replay will be available on the company’s website, as well.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them. These statements are based on current expectations of Management and involve inherent risk and uncertainties, including those identified in the Risk Factors section of LifeVantage’s most recently filed 10-K and 10-Q. These risk factors contain a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements.

Also on today’s call, we will be referring to GAAP and non-GAAP financial results. We have non-GAAP reconciliation tables in the earnings release and will also be on our website. We are presenting adjusted gross profit, adjusted gross margin, adjusted operating income, adjusted net income and adjusted earnings per share. But the management believes that excluding the product recall cost from the relevant to GAAP measures when viewed with our results under GAAP and the accompanying reconciliations provide useful information about our period-over-period growth and profitability that provides additional information that is useful for evaluating our operating performance.

This call also contains time sensitive information that is accurate only as of the date of this live broadcast February 7, 2013. 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 please limit the number of your questions to three to allow everyone to asked their question.

And with that, I’d like to turn the call over to the company’s President and Chief Executive Officer, Mr. Doug Robinson. Please go ahead.

Doug Robinson

Thanks John. Good afternoon, everyone. On today’s call, I will briefly review our Q2 2013 results, and will provide a general update on our business and growth initiatives. After that, I’ll turn the call over to Dave Colbert, our Chief Financial Officer, for a more detailed discussion of second quarter results.

First, let me provide a quick review of our financials. Our second quarter results reflect strong year-over-year growth in revenue and cash flow underscoring the operational improvements implemented during the first few quarters. We generated revenue of $53 million during the second fiscal quarter, an 111% increase compared to our second quarter of last fiscal year.

We have continued to make the appropriate investments into our expanding infrastructure, focus on our geographic expansion and launch new products while still increasing our cash position to $28.5 million as of the end of the quarter. This financial strength gives us the flexibility to make strategic and selective investments into our business going forward as we see appropriate.

During the second quarter and first six months of this fiscal year, we positioned the company for long-term responsible sustainable growth. We achieve $106 million in revenue in only the first six months of the fiscal year. I think it’s important to note that we generated $126 million in revenue for all of fiscal year 2012. We held the grand opening of our office in Tokyo, we hired David Toda as President of Japan KK and Managing Director of Asia Pacific. David was previously Vice President and Chief Marketing Officer of Amway Japan.

We entered the Hong Kong market. We launched a re-formulated Japanese Protandim product and immediately after the quarter concluded, we launched our new product focus on companion pets, canine health.

Our entire team has positioned our company for strong growth in the second half of fiscal year 2013. I’m very proud of how we performed during the first six months of this fiscal year. We rose to the challenges that we faced in our better, stronger company today having gone through what we have as a team.

Now, I want to note that on a sequential quarter basis, our growth was up slightly. It’s important to understand why. We believe there are three primary reasons for the slight increase in sequential revenue from first quarter to second quarter. First, as you know – in the network marketing business, there are certain times of the year that are inherently seasonal and not as strong as others.

The holiday months of November and December are historically slower than other months in the year in this industry. By contrast, the first and second quarters of the calendar year are historically much stronger. Second, we believe our growth was temporarily affected by our voluntary recall of Protandim initiated in early December. I will discuss later in the call the measures we have taken following the recall with our manufacturing partners and our distributors to ensure ongoing confidence in our products, but suffice to say I believe this has made our company a better company.

Third, we saw as short term slowdown in the Japan market, as a direct result of the administrative complexities associated with the move from not for resale status to an on-the-ground physical presence. We believe after the transition, we will continue moving forward as planned, and that Japan will continue to be a critical market for us in the future. I will also discuss this a little later in the call in more detail.

All this said, we are very bullish as we move forward in the third and fourth quarters of our fiscal year, for a number of reasons. First, we believe our on the ground efforts in Japan coupled with the addition of David Toda, our new Asia Pacific leader will position us for long-term growth in that region. David has tremendous management skills and an impressive background. Importantly, we introduced a new formulation of Protandim in Japan that believe to be a potent Nrf-2 activator. It will push that market to the levels we previously anticipated by minimizing the previous regulatory uncertainty.

Second, we are reinvigorating our R&D effort that we believe will result in great products and research moving forward with the introduction of Dr Wally as our new Chief Science Officer. Third, we have seen an expansion of our business in Hong Kong and believe that further penetration in existing markets and due diligence of new markets will position our company for additional revenue growth. And finally, as I stated earlier, we believe we are a much better company as a result of the actions we have taken following our voluntary recall.

So let’s talk about the recall. As many of you are aware, in the early December, we announced the voluntary recall of certain bottles of Protandim, we were alerted to the possible inclusion of small metal fragments in the final product. The fragments were originally discovered in batches of turmeric extract, an ingredient in Protandim we purchased from third party suppliers.

Our entire team from the corporate level to the distributor level was extremely quick in responding to this situation. We do not believe this has resulted in any adverse health effects to our customers. I want to reiterate that LifeVantage is deeply committed to providing the safest, most pure products for our distributor network and customers.

We have implemented even more stringent industry leading measures including several redundant measures in our manufacturing process as well as in our safety assessments and evaluations of our third party suppliers and manufacturers.

We have also started a comprehensive quality certification process that we hope to speak more of in the future. The process that believe will further provide confidence to the market and our consumers.

As it relates to our financial results, the recall resulted in approximately $5.9 million of one-time costs. Although, it is early in the recovery process, it is also important to note that we have not accounted in the second quarter for any recovery from our suppliers and vendors for those losses. We will provide updates to these efforts in future calls as material changes occur.

I am pleased to say that throughout this process, our distributors and preferred customers continue to show their support for our product and we expect that support will continue in the future.

We entered the third quarter with the majority of the cost related to the recall behind us. We are attracting new distributors to our company and we are confident that we are a stronger company today based on our response to this situation and the support of our existing and growing distributor base.

Let me now review some metrics related to our distributor and preferred customer base. As a reminder, when we look at our customers, we classify the majority as falling into one of two categories, independent distributors and preferred customers. As of December 31, 2012, we had approximately 55,000 active independent distributors defined as people who purchased a product in the prior three months for retail and personal consumption, a significant increase compared to approximately 27,000 active independent distributors as of December 31, 2011.

Our other customer category, preferred customers are defined as people who purchased product in the prior three months for personal consumption only and with no intent to resell. A preferred customer may enroll as an independent distributor at any time should they decide they are interested in reselling the product.

As of December 31, 2012, we had approximately 141,000 active preferred customers compared to approximately 65,000 active preferred customers as of December 31, 2011. Approximately eight out of 10 new customer enrollments in the second quarter of fiscal 2013, enrolled as preferred customers. Our strong base of preferred customers is a great source of word of mouth advertising for LifeVantage and our products. We also believe our large base of preferred customers provides tremendous credibility to our company, by validating the attractiveness and belief in our products, in addition to the very strong network marketing business opportunity.

For those of you modeling our business and tracking these metrics on a sequential basis, it’s important to keep in mind that our active distributor and preferred customer account is also impacted by the three factors I discussed earlier.

Now, I would like to move the discussion to our international expansion efforts. The long term potential for LifeVantage outside our core US market is incredibly robust. Our biggest international market is currently Japan, which represented 38% of total sales in the second quarter of fiscal 2013. As we previously announced in October, we celebrated the grand opening of our new Tokyo office, which will enable to us to further expand our presence in the Japanese market.

For the past two and half years, we have been selling Protandim and True Science in Japan using a not for resale model. And this grand opening marks an important transition point for our move to a complete on-the-ground physical presence in Japan.

The grand opening was quite successful, as it was well attended by independent distributors, vendors, and other friends of LifeVantage and further gave us confidence of our tremendous potential in this market. We are scheduled to hold our first ever elite academy in Japan, at the end of February. And we are extremely pleased by the projected turnout based on registrations today. Our Japanese customers are passionate about Protandim and True Science and we remain optimistic about the long-term potential for this market.

As we also announced previously, we released our reformulation of Protandim in Japan, internally directed research and development programs have enabled LifeVantage to produce a formulation of Protandim, for the Japanese market that meets recently enacted local regulatory requirements.

As part of our ongoing global R&D program at LifeVantage, we conducted a proprietary sale bio-assay test that allowed us to identify an ideal formula for Japan that we believe causes significant Nrf-2 activation. The formulation being distributed in Japan is currently the subject of a placebo controlled double blind clinical study being conducted at Colorado State University. Preliminary data from that study show the product to a potent oxidative stress reducer.

We also recently announced our official expansion in the Hong Kong. Hong Kong is one of the world’s great financial centers with the history of entrepreneurship, innovation and capitalism. We expect the potential customers and distributors in Hong Kong will respond positively to our combined messages of healthy living and the dynamic business opportunities represented by LifeVantage and our products. David Toda, oversees the day to day operations of LifeVantage in Hong Kong.

More broadly, Asia represents tremendous growth potentially and we are continually exploring new markets while maintaining our commitment to control the sustainable growth. We know that international growth will be an important element to the long-term success of our business. We believe we have only scratched the surface of our global potential reach. That said, we perform extensive due diligence before we enter a market to ensure that it meets our return on investment requirements.

There are unique rules and regulations within each country and our international success is dependent on our thorough understanding of each market’s operating environment before we enter.

In addition to expanding our international presence, we’re also continuing to invest in our core United States operations, in areas such as personnel and expanding our research and development efforts with the goal of developing or acquiring new scientifically validated research backed products that complement our current product portfolio.

Last month at our elite academy in San Antonio, we announced our newest healthy living product, canine health a supplement specifically formulated for dogs to combat oxidative stress through Nrf-2 activation. Like humans, dogs suffer from oxidative stress and research shows that canine companions can benefit from the same active ingredients contained in Protandim.

The product is also formulated to support joint function, mobility, flexibility and cognitive function. We develop this product in conjunction with renowned veterinarian and authority in animal nutrition, William Barnett, who has nearly 40 years of experience in veterinary medicine and bringing products to market design to improve animal health.

Another key area of improved focus and increased investment has been and will continue to be our sales and marketing support to our independent distributors, educating new and existing customers on our products. We have a strong slate of distributor events on the calendar for the second half of fiscal 2013, ranging from smaller regional events to our elite academies and ultimately our annual convention.

Educating and rewarding our distributors is an extremely important part of our business model. And we will continue to evaluate and invest in new ways to support our distributors to help them achieve the level of financial success that they are striving for.

In fiscal 2013, we have identified specific markets that we believe have the highest potential for growth. And we will be concentrating and adding additional distributor events in these areas.

With that, I’d like to turn the call over now to Dave Colbert, our Chief Financial Officer to review our financial results in more detail and discuss our outlook for fiscal 2013. Dave, go ahead.

Dave Colbert

Thank you, Doug and good afternoon everyone. In the second fiscal quarter of 2013, we generated net revenue of $53.4 million, which is 111% increase over the second fiscal quarter of 2012. As previously discussed, we announced a voluntary recall of select lots of Protandim during our second fiscal quarter. At the time of the announcement we estimated the cost of the recall as $7 million, before any type of remuneration from vendors or suppliers.

In our second quarter GAAP results, we recorded $5.9 million in recall costs. We believe this captures the majority of the cost related to the recall. The $5.9 million is comprised primarily of material write-offs totaling $3.7 million. The remaining costs are for shipping replacement bottles and other recall related costs.

Gross profit in the second fiscal quarter of 2013 increased to $38.8 million from $21.6 million in the same period last year, resulting from higher sales. Our gross margin in the second fiscal quarter of 2013 was 72.5% compared to 85.4% in the same period last year. The decrease was due the $5.9 million one-time product recall cost and also a $450,000 charge related to the write-down of marketing materials to comply with regulatory requirements.

This regulatory requirement is a direct result of the United States and Japan regulatory requirement stemming from our changing business processes and legal entity structure. Excluding only the recall cost, adjusted gross profit for the quarter ended December 31, 2012 would have been $44.6 million for a gross margin of 83.5%.

Total operating expenses for the second fiscal quarter of 2013, was $38.3 million, which is 71.6% of revenue. This compares to $17.3 million or 68.5% of revenue in the prior year period. On a sequential quarter basis, operating expenses as a percentage of revenue decreased slightly compared to 72.2% in the first fiscal quarter of 2013. The increase in operating expenses is primarily due to increased sales commissions which are a direct result of our increased revenue. The increase also reflects our commitment to invest responsibly in infrastructure and resources in order to prepare for healthy future growth

To support our outstanding business, it’s important that we make investments into areas such as personnel and office space in Tokyo and Salt Lake City. To give you some more perspective on our investment in personnel, our total headcount one year ago at December 31, 2011 was 90. On December 31, 2012, our total headcount increased to 250, representing a 178% increase.

We are also increasing our year-over-year spending on sales promotions in order to maximize the opportunities of our outstanding business in coming quarters. In addition for modeling purposes, please note that our depreciation expense increased to $443,000 in the second fiscal quarter of 2013 compared to $97,000 in the prior year.

In the second fiscal quarter of 2013, we generated operating income of $487,000 compared to $4.3 million in the second fiscal quarter of last year and compared to $6.9 million in the prior sequential quarter. Excluding costs associated with the recent recall adjusted operating income was $6.4 million.

Adjusted operating income margin again excluding one-time cost was 12% in the second fiscal quarter compared to 16.9% in the same period last year and 13.1% in the first fiscal quarter of 2013. The difference in sequential quarter operating margin is primarily due to the previously stated marking material write-offs impacting cost of goods sold. We expect that our operating income margin will increase during the second half of fiscal 2013 as revenue continues to grow at a rate faster than our underlying operating expenses.

In the second quarter of fiscal 2013, we generated a GAAP net income of $209,000. Again, this includes $5.9 million of one-time costs related to the recall. This compares to net income of $8.8 million or $0.05 per fully diluted share in the second quarter of fiscal 2012. This prior year net income includes $4.4 million of income stemming from a $1.3 million tax benefit and a $3.1 million favorable change in the fair-value of derivative warrant liabilities. Our second quarter fiscal 2013 adjusted net income was $3.8 million or $0.03 per fully diluted share.

Looking to our balance sheet, we continue to strengthen our overall financial position. At the end of the second fiscal quarter of 2013, we generated $5.4 million of cash from operations and our cash balance increased to $28.5 million up from $24.6 million as of June 30, 2012.

Because of our strong balance sheet and our commitment to maximize shareholder value, in December, we announced a share-repurchase program that authorizes the company to utilize up to $5 million to purchase shares of its common stock.

To date we have repurchased approximately 270,000 shares at an average buyback price of $2.25. We have spent approximately $612,000 of the $5 million originally committed to the share purchase program.

Now, I will discuss our 2013 full year guidance. We are reaffirming our previously issued revenue guidance and revising our profitability guidance for fiscal year 2013. For the full year ending June 30, 2013, we expect to generate revenue in the range of $250 million to $260 million. Due to the $5.9 million one-time recall cost recorded in the second quarter and anticipated higher manufacturing related costs, we expect to see a gross margin of approximately 82% for the full year and generate operating income in the range of $27 million to $31 million, which equates to an operating margin of between 10.8% and 11.9%.

Looking below operating income, we expect to generate earnings per diluted share in the range of $0.13 to $0.15 based on a weighted average 129 million shares outstanding. For comparative purposes, the previous range was $0.18 to $0.20 per share, and the difference consists of $0.03 per share due to recall related costs and $0.02 per share due primarily to additional manufacturing costs.

For modeling purposes, recall that we no longer have to account for derivative liabilities related to our outstanding warrants, but this did impact our results in fiscal 2012 for comparative purposes. In addition, we do expect to see our effective tax-rate increase in fiscal 2013 to approximately 39.6% for the full fiscal year.

In summary, we have a lot of hard work to do ahead of us. We are also well positioned as we began the second half of the year. We’re in a strong financial position, and we look forward to capitalizing on the opportunities ahead. Doug?

Doug Robinson

Thanks Dave. And as a reminder, before we open the call up or as we open the call up for questions, in addition to myself, here to answer questions we’ve got Dave Colbert, our Chief Financial Officer as well as Bob Urban, our Chief Operating Officer.

So, with that operator, I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question from Justin Ruiss with Sidoti.

Justin Ruiss – Sidoti

Hello gentlemen.

Doug Robinson

Hey Justin.

Dave Colbert

How is it going?

Justin Ruiss – Sidoti

I just have some quick questions. The headcount that you guys – that you have – that 250, are we keeping that stable or are we looking to increase that headcount?

Doug Robinson

Well, neat. First of all, thanks for your questions. Let me put things in perspective first of all. Last year, and I’ve said this publicly in previous calls, last year being fiscal 2012. We found ourselves for all sense and purposes chasing revenue. Our infrastructure which was at that time exclusively in the United States was behind what it needed to be to adequately scale the company for the growth that was in front of us. We recognized that – we put plans in place in fiscal ‘12.

And then more importantly in the current fiscal year, we put plans in place to scale the company for effective, successful, long-term growth. And that’s what we’re operating under – we’re scrutinizing new hires very, very closely with – but we’re building the infrastructure responsibly.

The second point that really needs to be made and called out, when you look at those numbers is that and I just alluded to this, in fiscal ‘12 we did not have an operation in Japan. We now do have an operation in Tokyo. And that was absolutely necessary as we moved from not to resale to an on-the-ground status in Japan. So, that office in Japan, which David Toda is managing, now has a headcount that’s I think approaching about 40 people over in Japan. So, that 40 is inclusive in the 250.

But it’s just important to understand how that company is scaling and growing as we move from a company that last year had a top-line of $126 million and this year we plan to be more than twice that.

Justin Ruiss – Sidoti

Got you. And again, that same question applies to CapEx, I mean, it looks like those are giant spending CapEx for this year or this quarter, I’m sorry. Are we – can you kind of at least, I don’t know if you can guide to it or I’m sure it’s related to kind of maintaining, like you said, maintaining the growth but I just wanted to make sure that that number is not something that will either appear again or we’re flat on that or what are we looking at?

Dave Colbert

Hi Justin, this is Dave. For CapEx, for the full year, we’re anticipating to seeing about $6 million in total of CapEx, we have some more investment to do in the back half of the year. So, probably in the next six months you’ll see another – approximately $2 million of CapEx flow through. Again, in support of additional headcount, in support of some investments and systems that we’re making both in Salt Lake and Tokyo, and office build-outs etcetera. So, you will see some continued CapEx, but for the full year, we’re looking around $6 million.

Justin Ruiss – Sidoti

Perfect. Thank you very much gentlemen.

Doug Robinson

Thank you Justin.

Dave Colbert

Thank you Justin.

Operator

And we’ll take our next question from Si Timbermann with Astron Capital.

Si Timbermann – Astron Capital

Hi, first question is okay, so we go from 85% gross margins to 82%, so 300 basis points, can you explain that one for me first please?

Dave Colbert

Yes, Si this is Dave. The big component of that is the almost $6 million of write-off that we realized in the second quarter. That plays into the 82% that you’re talking about. And also between now and the end of the year, coming out of the recall process and really our focus on getting above industry standards and what do we doing from – our vendors are doing from a manufacturing process and QA process, we’re asking them to do more, a lot more.

And so, with that there comes, incremental cost. And the remainder of that also plays into getting to the 82% for the full fiscal year. But a big lion’s share of that 82% comes from the almost $6 million of the write-off.

Si Timbermann – Astron Capital

All right. Okay, second question. Okay, in regards to preferred customer retention. What are you doing to make sure that they are retaining these particular customers? Are you going to provide retention rates and/or insurance for customers that let’s say that are here that have signed up for the program here out?

Bob Urban

Si, this is Bob Urban, let me address the first part of that and then I’ll turn it over to Dave for the second part of your question. In terms of retention and what we’re doing as we go forward, we’re putting several programs in place. As you may or may not be aware, we quarterly meet with the majority of our PC, our distributors in the sales and we have a trickledown effect as it pertains to our PCs out there.

We’re putting multiple programs in place, we’re sending out enhancement opportunities for them to sign up for this. And then we’re enquiring as to why they are – why are they trading at the rates that doing at this point in time so that we can mitigate that for future purposes.

Si Timbermann – Astron Capital

All right. Will there be some type of metrics in regards to retention or churn going forward or no?

Dave Colbert

Si, this is Dave. We’re watching those metrics closely. When we look at the history of LifeVantage, we’re just over three years old and network marketing. And we’re watching the trend we’re generating a lot of data and watching the metrics closely. We have retention rates and we watch it by market, US, Japan, by distributor, by preferred customer. And we’re comfortable with the trends. And we think it’s going to be valuable for the investment community. Then we’ll come forth with that.

We do know that there are some proxy metrics out there with other folks, companies in this industry and they provide them on an annual basis. So, we’re trying to figure out strategically what makes the most sense for our investor base and also what makes the most sense for us as a management team to communicate that out, so stay tuned as well stay on that metric.

Si Timbermann – Astron Capital

All right. Given the fact, if you take a look at your model, if I had modeled this, I look at this as more of a subscription model. Is that how you guys would view this or you tell me?

Doug Robinson

Yes, it’s an ideal subscription model. As you know Si, we have a number of actually a vast majority of our customers are on Auto-ship where they have given us the credit card and we send them the product on a monthly basis, whether it’s a distributor or a preferred customer. We ship the product direct to that customer. And so, it is a subscription based model for the most part.

Si Timbermann – Astron Capital

Okay, very good, thanks guys, I appreciate it.

Doug Robinson

Yes, you’re welcome.

Operator

We’ll take our next question from David Rothman with Phoenix Capital.

David Rothman – Phoenix Capital

Hi guys.

Doug Robinson

Hi David.

David Rothman – Phoenix Capital

I’ve got a couple of quick questions, given – I’d like a little more information about the possibility of reclaiming some of the lost revenue and income from the product recall, vendor liability obviously, plays in here as well as final point of manufacturing. I’d like you to address these things as well as the possibility and probability that those funds will be recouped in a rough timeframe, we could possibly expect that. Also as the company grows, we’ve seen to make sense, the company should consider in-house manufacturing at some point of the products. The other question, I’ll ask after you answer this one?

Doug Robinson

Okay. So, David, this is Doug. Let me start off and then I’m going to defer to Dave Colbert for part of the answer to this first question. First and foremost, when this recall came upon us, we acted as I said in my prepared remarks, very quickly, swiftly to address the situation. But it’s got to be very, very clear that our concerns, first and foremost in early December were the safety of our customers, and consumers, people that are consuming potentially contaminated products. So we threw our - cast the net as wide as we felt was appropriate based upon the information that we were gathering around the turmeric extract and the contaminated material that might have made its way into finished goods.

Our focus was first and foremost the safety for our consumers. I said however, literally within 24 hours of announcing our voluntary recall, that we will turn our sights soon to cost recovery. But first and foremost we’re going to be focused in on safety. Here we are, several weeks now, after the recall, and we are now turning our sights on cost recovery. So, I will leave it at that, I’ll turn it over for more specifics to Dave, to kind of round out that and what we expect on a go-forward basis along those lines.

Dave Colbert

Right, thanks Doug. Yeah, we have had some preliminary meetings with vendors, their insurance providers but there are several more parties that we do need to meet with. As you can appreciate this is a really sensitive topic and a sensitive issue with all parties involved. And so, we need to be careful about how much we say and how much we disclose, really as it relates to how these negotiations go forward.

So, we are prepared to be as aggressive as we need to be to recoup some type of remuneration from them for these costs. But at this point, again, as you can appreciate, it’s going to take a while there is a lot of discussions. And unfortunately due to GAAP accounting rules, I couldn’t anticipate or try to even make any type of adjustment for that in Q2, it offset almost $6 million of cost.

So, when we actually get the money in and we hope it’s 100%, but when we actually do start to see money coming in, you’ll start to see that impact run through our financial statements.

David Rothman – Phoenix Capital

So, we may see a nice time in subsequent quarters?

Dave Colbert

It’s possible. It again, if we’re successful in recouping some of these funds, that period in which we recoup them is when we recognize it on the financial statements.

David Rothman – Phoenix Capital

Thank you Dave. And last question is based on the increased manufacturing costs, and the margins which remain below industry – other similar industries or companies in direct marketing. Do you have any problem with the increase in prices based on your increased cost?

Doug Robinson

You know David, it’s something that we discuss from time to time at the management level. We look at our costs of goods sold. We look at our manufacturing settings, one of the parts of your previous question that I didn’t get a chance to answer was would we consider bringing manufacturing in-house, similar to your follow-on question around pricing, it’s something that we as a management team regularly review, cost of our goods, price of our products, price-points, especially as we introduce new products, how all of those prices from a consumption model standpoint from consumers impacts their ability to buy and buy more from us.

And how much does it cost us to manufacture it, for outsourcing or should we bring certain things in-house. We consider all of those issues on a regular periodic basis, but especially when we look out into the future, proactively on our business strategies. And we’ll continue to do that.

David Rothman – Phoenix Capital

Thanks guys.

Doug Robinson

Thank you.

Operator

(Operator Instructions). Well go next to Jim Galloway with Galloway Enterprises.

Jim Galloway – Galloway Enterprises

Thank you, a couple of questions. First is, where do we stand with peer reviewed studies that are ongoing. I’m wondering if we’re spending much of our R&D dollars trying to encourage more studies, and where we stand there. And also on studies, there have been talk in the past for example, some military units were taking Protandim. I’m wondering are there many human studies that were planning or underway.

Doug Robinson

Yeah, Jim, these are all great questions, this is Doug. We have numerous studies underway but let me define we. These are all third party studies, we know they’re underway because typically we’re involved at the very, very beginning when the ideas for the study, the organ of the body – the element that might be explored and how Protandim might affect that organ or that element. We’re often quizzed early in the process, but we also provide products, so that we’re aware as these studies are being conducted by these third parties that they’re underway.

Stopping there, we’re not in control of the pace of the studies, where they stand, we’re given hints from time to time that certain studies are maybe nearing conclusion based upon questions that come back to our Science team. But sufficed to say and I say this often, we have numerous peer reviewed published papers already on Protandim and we have many more underway.

All of that lends tremendous credibility to the validity of our science backed products. And we couldn’t be more pleased. It’s also been frankly quite an attractive business model from an R&D standpoint because much of the cost to date for these studies has been born outside of the company.

That said, as you know, we have recently hired a new Chief Science Officer, Darlene Wally, she has a background, if you’ve seen her, her experience and her background in research and development and new product development. And I even said in my earlier marks, in this call and previous calls that we plan to expand our product base. And a perfect example is our new canine health product that we just introduced.

So, we have very aggressive plans for R&D on a go-forward basis. And I’m very pleased with the direction of the company from a healthy living standpoint, the science that we’re in and where we’re headed. Does that help?

Jim Galloway – Galloway Enterprises

It helps a little bit but I’m wondering about human studies. Can you give me any more on that for example I think it was marines down in Southern California that was supposedly doing the study?

Doug Robinson

Yeah, I can’t talk specific on perspective studies or studies that are underway for all the reasons that I just described they are not our studies, the third parties. Sufficed to say, some of the studies I know involve humans. And some are mice and other rodents.

Jim Galloway – Galloway Enterprises

Another question I have, and it’s about marketing and public relations. Public awareness initiatives, what are we doing for product placements in media, what sort of interviews are members of the company giving, either presentations to natural health association, meetings and things like that. How are we doing for more outreach in the communities?

Doug Robinson

That’s a great question Jim. We are very mindful of where we’re at with respect to public relations and outreach. It wasn’t that long ago in the company’s history that we couldn’t necessarily think of that very much because we didn’t have the people or the resources necessarily focusing on that.

Let me start first with respect to our independent distributors who were for all tense and purposes they are external sales people. In last calendar year alone they were upwards of 13,000 different meetings talking about LifeVantage, talking about the business opportunity, talking about our products.

As you know, we also have Donnie Osmond as the spokesperson. And he’s been on various different shows and from time to time, he’s allowed time to talk about Protandim and talk about the effects of Protandim and how that’s helped him in his testimony.

We are also working with obviously ICR from an Investor Relation standpoint externally. We’ve been at numerous investor conferences and plan to be at many more on a go-forward basis. Getting the word out on who our company is especially now that we’re trading on Nasdaq what our business plans are on a go-forward basis. And we’re also working with an external public relations – public affairs company on responsible outreach if you will in the dietary supplement world, in the neutraceutical world, in the cosmoceutical world etcetera.

And then beyond that, we’re participating in various different boards and advisory boards around direct selling at the World Federation of Direct Selling, here in the US, the Direct Selling Association, we’re very active in that as well. So, we have a multi-pronged outreach program that is quite disciplined with a number of different people, some of whom are sitting around the table with me right now. But throughout our management team as the company, and certainly with our lead distributors to get these public relations messages out there appropriately.

Jim Galloway – Galloway Enterprises

Thank you. Keep up the good work.

Doug Robinson

Thanks Jim, appreciate it.

Operator

This does conclude today’s question-and-answer session. At this time, I’d like to turn the call back over to Doug Robinson for any additional or closing remarks.

Doug Robinson

Well, thank you very much. And importantly thank you for your participation in today’s call. And your continued interest in and support of LifeVantage. Let me reiterate our confidence in our distribution network. Our strong international opportunities, new product opportunities and our growth prospects for the remainder of fiscal 2013.

I’ve said it a number of times and I’ll repeat it here, I couldn’t say in any more conviction that we’re a stronger company today than we were at the beginning of this fiscal year. And we’re very excited about our future. As I just said a moment ago, we will be attending the Accredited Members conference coming up here at the end of this month. And then in mid-March the Roth Capital Conference from an Investor Conference standpoint and beyond that we’ll be at others.

So, we hope to see many of you there. Again, thank you very much for your participation in the call today and your support of LifeVantage going forward.

Operator

This does conclude today’s conference. Thank you for your participation.

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