Lifevantage's CEO Discusses F3Q13 Results - Earnings Call Transcript

| About: LifeVantage Corporation (LFVN)

Lifevantage Corporation (NASDAQ:LFVN)

F3Q13 Earnings Call

May 9, 2013 4:30 PM ET


John Mills – IR

Doug Robinson – President and CEO

Dave Colbert – CFO


Justin Ruiss – Sidoti

Jim Galloway – Galloway Enterprises

Bradley Donner – JP Turner

Al Doney


Good day, everyone, and welcome to today’s LifeVantage Third Quarter Fiscal 2013 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills of ICR. You may begin.

John Mills

Thank you. Good afternoon, ladies and gentlemen, and welcome to the LifeVantage Corporation’s fiscal third quarter 2013 conference call. On the call today from LifeVantage are Doug Robinson, President and Chief Executive Officer; and Dave Colbert, Chief Financial 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 the release, it is available on the Investor Relations portion of LifeVantage’s website at 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 it will also be on our website.

We are presenting adjusted gross profit, adjusted gross margin, adjusted operating income, adjusted net income and adjusted EPS because management believes that excluding the product recall cost from the relevant GAAP measures, when viewed with our results under GAAP and the accompanying reconciliations, provides useful information about our period-over-period growth and profitability and 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, May 9, 2013. LifeVantage assumes no obligation to update any forward-looking projection that may be made in today’s release or call.

Based on the number of participants on today’s call, during the Q&A session, we ask that you please limit the number of your questions to three.

And with that, I would like to turn the call over to the company’s President and CEO, Mr. Doug Robinson. Go ahead, Doug.

Doug Robinson

Thanks, John, and good afternoon, everyone. On today’s call, I’ll briefly review our financial results for our third fiscal quarter and 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 third quarter results.

First, let me provide a quick review of our financials. In the third quarter, we generated revenue of $50.4 million, reflecting a 39% increase compared to the prior-year period. And we achieved net income of $3.4 million. We ended the quarter with a strong cash position of $27.2 million. This financial strength gives us the flexibility to make strategic and selective investments in our business for the benefit of our shareholders, as we see appropriate.

As we have discussed on our prior call, throughout fiscal 2013, we faced some significant operational challenges that are reflected on our third quarter financial results. Specifically, we were faced with our voluntary recall of select lots of Protandim; our transition in Japan to a full office, with services and support operations; a reformulation of Protandim in Japan, driven by local regulatory requirements and an increased ratio of preferred customers to distributors.

Today, I’ll spend a few minutes describing the steps we have taken to address each one of these events. However, while we’re aggressively addressing these issues, we’ll continue to face headwinds in some cases. That said we also believe that by working through these challenges, we’ve made great strides in our business and are a better company for having persevered.

Given our long-term view of the company’s prospects, we’re moving forward with a process that we believe will culminate in the repurchasing of up to $50 million of our stock in this calendar year. We have already purchased $5 million of our stock under a previously announced program.

We have another $5 million repurchase plan authorized, and we’re now in the process of pursuing a $30 million to $40 million credit facility for the sole purpose of repurchasing additional shares of our stock. We believe one of the best uses of our cash and leveraging our cash flow is to enhance shareholder value with the repurchasing of our shares.

Let’s look at our results with a broader lens for a minute before I address some of the challenges we have faced and the steps we have to taken to correct these challenges. For the nine months ended March 31, 2013, our sales were $157 million which represents a 92% increase compared to the first nine months of fiscal 2012. To give some perspective, in the full 2012 fiscal year, we generated revenue of $126 million, so fiscal 2013 is already another record sales year for LifeVantage.

Recently, our revenue growth during calendar 2012 was recognized by Direct Selling News, the industry’s leading publication, as we were named the world’s 61st largest direct selling company.

We moved up the list 20 positions from our 2011 ranking of 81st. Direct Selling News also recognized LifeVantage for having the second largest year-over-year percentage growth in 2012 in the direct selling industry. Our growing position on this list is a testament to the quality of our science-based products and the business opportunity that we are able to offer our growing base of motivated and loyal distributors.

Now, I’d like to take a few moments to discuss again some of our recent challenges; namely, the voluntary product recall of Protandim, transition to an on-the-ground operation in Japan the reformulation of Protandim in Japan and the shift in preferred customer-to-distributor mix that we saw through the first half of the fiscal year. All of these challenges significantly impacted our Q3 results. However, we have implemented measures to address each one.

First, our results in the third quarter were impacted by our previously discussed voluntary recall on our flagship product, Protandim. Especially in the first two months of the quarter, we experienced a drop in new distributor and preferred customer enrollments.

We were pleased, however, that we did not experience a significant increase in the cancellation of our monthly recurring orders, which we refer to as Autoships. We believe this fact reaffirms our existing customer satisfaction with Protandim and with our team’s handling of the recall.

Subsequent to the recall, we’ve implemented additional quality control processes and procedures into our manufacturing and sourcing activities. These include

enhanced systems and new, more powerful magnets used for screening at all manufacturers; screening of raw materials prior to blending; additional tablet metal detection prior to bottling; and additional testing of batches for other contaminants.

We have communicated these measures to our distributors and loyal customers and have worked with our distributors to help them communicate with their networks.

In addition, I want to briefly speak about our efforts to recover the approximately $6 million of costs incurred as a result of the recall. As I discussed in our last quarterly earnings call, when this recall first occurred we focused primarily on safety and quality issues.

Now, we’re turning our attention to the matter of cost recovery. We are engaged in discussions with our raw material suppliers and contract manufacturers as well as with their insurance providers and legal teams, all with the goal of recovering costs associated with this recall. We will update you as we progress.

Second. Our third quarter revenue in Japan was negatively impacted by the on-the-ground transition, which we have described in prior calls. For us, on-the-ground means that we have now built an entire infrastructure in Japan to support a growing and successful business. The Tokyo office, which did not exist a year ago, is fully operational and has sales, marketing, distributor services, accounting and other functions.

Under Japanese law, however, moving to an on-the-ground presence in Japan required us to re-enroll every distributor and preferred customer in the country. The on-the-ground process was very time consuming and distracted us and our distributors and preferred customers from normal growth-related activity, leading to a slowdown in revenue.

The infrastructure in Japan is now in place. The enrollment process is completed, and we have strong leadership overseeing this new business model. Last month, most of our Japanese distributor leaders attended our third Annual Global Convention in Utah.

We are working closely with them to regain momentum in their businesses. This operational model will be better than our previous method of supporting the Japan market exclusively from our offices in Utah, primarily because we’re now able to offer the same level of customer service in Japan as we do here in the United States.

We do anticipate that the headwinds associated with the business support transition will persist in this fourth fiscal quarter. But we believe that we will regain momentum and see accelerated growth trends in our Japan business in fiscal 2014.

We know from our history in Japan that our products resonate well with consumers there. Tomorrow, I’m leaving on a two-week trip for Japan, Hong Kong and Australia to meet with country distributor leaders to reestablish revenue momentum in fiscal 2014.

Third, as we have also discussed previously, the regulatory-driven reformulation of Protandim for Japan created uncertainty in that market which, we believe, led to slower sales of the product during the last several months than we previously expected.

However, as I have announced previously, the initial scientific work on this reformulation has been completed. The formulation has been clinically tested, and the new compliant, reformulated Protandim has been sold and consumed throughout Japan since January 1. Feedback to date has been positive.

Fourth, in the second fiscal quarter of 2013, we reported an average of eight out of 10 new enrollments joining the company as preferred customers. It’s important to note that at various times during the third fiscal quarter, we saw that ratio approach nine out of 10 preferred customer enrollments. This metric is extremely important, as it indicates our strong product consumption model and validates the strength of our product offering.

However, at the same time, we do need distributor enrollments to continue to fuel our revenue growth. The higher this metric moves, the more dependent we are on our existing distributor base for growth.

We’ve recently implemented some long-term initiatives and programs, such as our LifeVantage University, the MyLifeVenture program and certain distributor compensation plan adjustments that have led to stronger growth in distributor enrollments versus preferred customer enrollments.

Approximately eight out of 10 new customer enrollments in the third quarter of fiscal 2013 enrolled as preferred customers. We will continue to work to bring this ratio in line with where we need it to be to have stronger, long-term growth.

In summary, each of these four issues, on their own, are significant but manageable. However, the combined impact of all four occurring at the same time proved to be more time consuming and more of a revenue headwind, which offset the normal growth we experience in our seasonally stronger fiscal third and fourth quarters.

Now, I’d like to review some specific metrics related to our distributor and preferred customer base. As a reminder, when we look at our customers, we classify the majority is falling into one of two categories, independent distributors and preferred customers. As of March 31, 2013, we had approximately 63,000 active independent distributors.

These are people who purchased product in the prior three months for both personal consumption and, in some cases, for resale. This is compared to 55,000 at the end of the second fiscal quarter of 2013, and a significant increase compared to approximately 37,000 active independent distributors as of March 31, 2012.

Our other customer category, preferred customers, is 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’re interested in reselling the product or have become interested in building a business and receiving a commission for their sales efforts.

As of March 31, 2013, we had approximately 140,000 active preferred customers compared to approximately 141,000 as of December 31, 2012, and approximately 92,000 active preferred customers as of March 31, 2012.

As I mentioned earlier, we were pleased that we did not experience a significant increase in the cancellation of our monthly recurring orders, which we refer to as Autoship. We believe the sequential drop in total preferred customers was the result of lower enrollments, due to the previously mentioned issues of the voluntary recall of Protandim, the on-the-ground transition in Japan and the reformulation of Protandim in Japan.

In an ongoing effort to help our distributors build their businesses and achieve their goals, we continue to offer opportunities for training and opportunities to collaborate among these distributors. For example, last month we hosted our third Annual Global Convention in Salt Lake City. The event’s attendance was the largest in the company’s history. And the energy confirmed the growth and ongoing support of our distributors.

In addition, we announced at this convention the launch of LifeVantage University, an online training tool for distributors. We also introduced MyLifeVentures, a branding for our distributor promotions that celebrates successes and the achievement of individual and team growth.

MyLifeVentures is a program designed to focus our distributors’ attention on the business opportunity of LifeVantage in addition to the products we sell. The objective is to accelerate growth by providing opportunities for our lower- and mid-level-ranked distributors to qualify and attend MyLifeVentures events and eventually qualify for MyLifeVentures Jeep. The program provides qualifiers with meaningful experiences with our Elite-ranked distributors, as they qualify to attend specific events and activities throughout the year.

Upon qualifying as an Elite Pro 7, with $100,000 in monthly sales volume and maintaining that rank, the distributors awarded their own MyLifeVentures Jeep, a symbol of the success and a symbol of the freedom that the LifeVantage opportunity affords them. MyLifeVentures is a culture and brand-building program, designed to motivate and drive distributor growth and revenue.

LifeVantage University is the latest addition to our Master Track distributor training system. It’s an online training system, consisting of interactive modules, designed to create a personal learning experience for beginning, mid-level and advanced distributors. The purpose of LifeVantage University is to improve quality control, expand our reach into all LifeVantage markets and to ensure that our messaging and training is consistent in every market we’re in. Both of these programs are being well received by our distributors.

Further, we’ve also made meaningful adjustments in our commission plan to drive the behavior and enrollment mix between business-building distributors and preferred customers in order to further motivate our distributors and grow our business responsibly. Although we’ve certainly had our challenges during the last several months, and we believe we will need to continue working to overcome some of these challenges in the near future. There’re a number of reasons why we are bullish on the opportunities for LifeVantage in the coming quarters.

First, our international business is building a better position for accelerated growth. We have strong leadership in place in the Asia-Pacific region. Completing the transition to full operations in Japan has positioned us for long-term growth in that country. Earlier this fiscal year, we expanded into Hong Kong.

We’re still in the early stages of establishing our presence in that market, but we are encouraged by the positive response in Hong Kong to our combined messages of healthy living and the dynamic business opportunities represented by LifeVantage and our products. We believe the Asia-Pacific region represents tremendous growth potential for us.

We are continually exploring new markets while maintaining our commitment to controlled and sustainable growth in each of our incumbent markets. We know that international growth and expansion will be important elements in the long-term success of our business. We believe we’ve only scratched the surface of our potential global reach.

Second. We have enhanced our product portfolio with the launch of Canine Health in the United States in late January. Canine Health is a supplement, specifically formulated for dogs, to combat oxidative stress through Nrf2 activation and to improve joint function and cognitive ability. Canine Health recently received the Quality Seal from the National Animal Supplement Council and is gaining traction in the marketplace, already representing 2% of our sales.

Third, we’ve applied our learnings from the voluntary product recall of Protandim and have implemented even more stringent measures in our processes, as I discussed earlier. We’re working on a comprehensive quality certification that we will speak more of in the future; a process that we believe will further provide confidence to that market and our consumers.

Fourth, over the past year, we’ve made strategic investments in our infrastructure to support future growth. We have expanded our head count versus the prior year in both our Salt Lake City office and our Tokyo office to ensure that we have the human capital to maximize our business. We continue to invest in our sales and marketing efforts to ensure that we have the most appropriate tools in place to support our distributors, including a strong slate of distributor events at the local and national levels, as well as distributor initiatives I mentioned earlier in my remarks.

Lastly, the US market represents a very large growth area for our company. Keep in mind, we’re still very early in our Network Marketing life cycle. Next week, we celebrate our fourth year selling our products through the Network Marketing business model, and believe the improvements we have made in our infrastructure, the leading distributors we work with and our exceptional product offerings have us positioned for many years of profitable growth.

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

Dave Colbert

Thank you, Doug, and good afternoon, everyone. As Doug mentioned earlier, in the third fiscal quarter of 2013, we generated net revenue of $50.4 million, which is a 39.1% increase over the third fiscal quarter 2012. Local currency net revenue for the period increased by 43.5%, but this was partially offset by an unfavorable foreign exchange impact of 4.4%.

Gross profit in the third fiscal quarter of 2013 increased to $43.5 million from $31.2 million in the same period last year. Our gross margin in the third fiscal quarter of 2013 was 86.4% compared to 86.2% in the same period last year.

During the third quarter, we received an initial payment of approximately $500,000 for our insurance company for recall recovery. Excluding this benefit, our third fiscal quarter gross margin was 85.4%. On a year-to-date basis, our gross margin is 81.3%. And on a non-GAAP basis, removing the recall impact, our gross margin was 84.7%.

Operating income for the third fiscal quarter of 2013 was $3.9 million or 7.8% of revenue. This compares to $6.4 million or 17.7% of revenue in the prior-year quarter. On a year-to-date basis, our operating income is 7.5%. And on a non-GAAP basis, removing the recall impact, operating margin was 11.2%.

The year-over-year operating margin erosion is primarily due to the lower-than-expected sales volume in the quarter. Also impacting our operating margin is our ongoing commitment to invest responsibly in infrastructure and resources in order to prepare for healthy, future growth.

To support our expanding business, it’s critical that we make investments into areas such as personnel and office space in Tokyo and Salt Lake City. To give you some perspective, over the course of one year, we’ve built a full-service office in Tokyo, capable of providing multifunctional support for our growing business in Japan.

Additionally, over the past year, we have made and will continue to make significant investments in our back-office systems, supply chain enhancements and structural operations and controls. We’re also increasing our year-over-year spending on sales promotions in order to maximize the opportunity for expanding our business in coming quarters.

In previous calls, Doug has discussed our strategic imperatives, one of which is responsible growth. We believe these investments were necessary for responsible growth. Long term, we expect to begin leveraging these investments, which will generate higher operating margins in the future.

In the third fiscal quarter of 2013, we generated net income of $3.4 million or $0.03 per diluted share. This compares to a net loss in the prior-year period of $4.8 million or $0.05 per diluted share, which included a $10.7 million non-cash expense associated with our now-retired derivative warrant liabilities.

On a year-to-date basis, our net income was $7.8 million or $0.06 per fully diluted share. And on a non-GAAP basis, removing the recall impact, net income was $11.4 million or $0.09 per fully diluted share.

Now looking to our balance sheet. We continue to strengthen our overall financial position. In the third fiscal quarter of 2013, we generated $3.7 million of cash from operations. And we increased our cash balance to $27.2 million, up from $24.6 million as of June 30, 2012.

During the third quarter of fiscal year 2013, the company completed its previously authorized $5 million stock repurchase program. In total, 2 million shares of common stock was repurchased as part of our program that was announced on December 14, 2012.

In addition, based on our long-term confidence in our business, we are pleased to announce that we have engaged D.A. Davidson as our advisor, while we pursue a $30 million to $40 million credit facility for the purpose of repurchasing shares of our stock. This $30 million to $40 million program is in addition to the current $5 million share buyback that was authorized on March 22, 2013, and the previously mentioned $5 million buyback that we completed in the third fiscal quarter.

We believe that the growing strength of our balance sheet, operating cash flow and expected top line growth has us well positioned for long-term, responsible growth. We look forward to providing updates on our progress with this initiative in the near future.

Now, I will discuss our 2013 full-year guidance. Due to events that affected our revenue in the third quarter and our overall momentum, we are revising our annual guidance. Please note that these projections are GAAP results and they do include recall expenses.

We now expect to generate revenue for fiscal year 2013 in the range of $207 million to $212 million, representing a 64% to 68% year-over-year growth compared to the previously announced range of $250 million to $260 million.

Due to the year-to-date $5.6 million of one-time recall costs and anticipated higher manufacturing related cost, we expect to see a gross margin of approximately 82% for the full year, and to generate operating income in the range of $12.5 million to $14 million. Operating margins are expected to be in the range of 6% to 7% compared to the previous range of 11% to 12%.

Looking below operating income, we expect to generate earnings per diluted share in the range of $0.06 to $0.07, based on an effective tax rate of 34%, and an estimated weighted average shares outstanding of 126 million shares. For comparative purposes, the previous range was $0.13 to $0.15 per share.

In summary, we have a lot of hard work ahead of us in the fourth fiscal quarter, as we position ourselves for the next fiscal year. We’ve made appropriate, long-term investments. And we’re pursuing initiatives that we believe will enhance long-term shareholder value.

And at this point, I’d like to turn the call back over to Doug for some closing comments before we take your questions.

Doug Robinson

Thanks, Dave. We face challenges this fiscal year, and the result’s culminating in our fiscal third quarter. We’ve attacked each challenge head-on with solutions and, in many cases, with multiple solutions. We believe these initiatives were essential for the near- and long-term health of the company and believe they will drive revenue momentum in measurable results in fiscal 2014 and beyond.

Throughout it all, we continue to be a healthy company. We’re confident in the long-term viability of the company. And we’re intent on pursuing up to $50 million of share repurchases this calendar year. As we wrap up fiscal 2013 and look toward next year, we’re well-positioned and will benefit from the hard work and progress we made in fiscal 2013.

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

Question-and-Answer Session


Thank you. (Operator Instructions). And our first question will come from Justin Ruiss of Sidoti.

Justin Ruiss – Sidoti

Good afternoon.

Doug Robinson

Hey, Justin.

Justin Ruiss – Sidoti

Just looking at the guidance, I just wanted to get a – just a kind of gist. Is there any revising to the capital spending that you guys are doing this year?

Dave Colbert

No revision to the capital spending at this point, Justin.

Justin Ruiss – Sidoti

Okay. And then it sounds like everything all offset – or at least, I guess everything’s in place now in Japan for growth to, I guess, start and this business to start. Is it a function of just being like late for that? Was it just being backed up? Or do you think you can recoup those sales?

Doug Robinson

Yeah. Really, Jeff – and it’s about regaining momentum more than anything else. As I said in my prepared remarks, what we faced in Japan was really a culmination of three large, impactful issues happening at once.

Certainly, the reformulation of Protandim, which was announced by the local regulatory body in Japan, in early 2012, there was a 12-month period of time run-up to up to companies like ours that have products with certain ingredient that they found to be unacceptable on a go-forward basis that was Ashwagandha to either reformulate or change your business model or what have you.

Obviously, we chose to reformulate. We were working hard at that for the full year, starting in early of 2012, but did not have any conclusive evidence or could make any announcements until, frankly, very, very late in the year, December, at such time that we had a product recall, global product recall.

And the culmination of the on-the-ground effort, administratively as well, having to re-sign up every distributor, every preferred customer in country. When you add all of three of those issues together, we absolutely lost momentum – sales momentum in Japan.

Keep in mind, Japan is the second largest direct selling market in the world, second only to the United States. So we are absolutely committed in that market. That’s why we’ve gone through the efforts of moving to the on-the-ground, to putting our stake down as firmly as we have in country and building the office to the degree that we have. We’re positioning ourselves for that sales momentum on a long-term, go-forward basis.

So, absolutely, we’re very bullish about this. And as I mentioned in my prepared remarks, I’m leaving tomorrow for an extended trip throughout Asia-Pacific, really following on our commitments to get that sales momentum back where it needs to be going forward.

Justin Ruiss – Sidoti

Do you think there’s anything that could hamper that momentum again? Or do you think all that’s in the past?

Doug Robinson

Well, that’s a tough question. Certainly, I’d like to believe that everything – all three of those issues that I just mentioned – we are now on the ground. We have re-registered all preferred customers, all distributors. Our recall is largely behind us, that was announced in December of 2012, globally.

And the reformulation of Protandim is done. The product has been selling – the reformulated product – since January 1 in Japan. It’s been well received by preferred customers and distributors, alike. And we’ve got great leadership in place over there.

So long-winded response to your question, I’m very bullish on the future. And we’re going to spend an awful lot of time and focus in that marketplace for the express purpose that it’s the second largest marketplace in the world for us. By all means, we should spend that kind of time and energy.

Justin Ruiss – Sidoti

Got you. Just turning back to North America. How do you feel in terms of how much of the market that you’ve captured? I mean are we still nascent in these?

Doug Robinson

We are. As I said, we’re one week or so shy of our fourth anniversary in Network Marketing. We have barely scratched the surface. And so that is very, very positive in that we’ve got so much in front of us, so much opportunity. That’s why we are taking the time, the energy to build the infrastructure appropriately for a long-term, sustainable, profitable company. But by all means, we have a lot of runway in front of us in the United States and, for that matter, in North America.

Justin Ruiss – Sidoti

Got you. And then just kind of to like – just to get a sense. How, I guess, do you have distribution centers that you’re using now? Are you distributing through third parties? How are you getting the product out there?

Doug Robinson

We are exclusively and have been, since mid-2009, distributing our products through Network Marketing, through our independent distributors. And absolutely committed to that model now and going forward. And I know, Justin you have a sense for the history of this company. 2013, we’re celebrating our 10th anniversary. But for all intents and purposes, we’re a four-year-old company in that we re-launched the company in mid-2009 into Network Marketing.

And when you look at our growth – and I know you’ve seen these numbers – since mid-2009, this company is well on pace to grow very, very responsibly. So we are absolutely committed to our Network Marketing distributors, the model. We think our products fit very nicely in that model. And we think the future is incredibly bright. All that said, we have barely scratched the surface. When you look at our metrics that we provided, that we shared in this call, and then look at the population in the countries that we’re currently doing business in, we have barely scratched the surface.

That’s all very, very good news for everyone that is associated with the company, whether you’re a shareholder, whether you’re an employee, whether you’re a distributor or preferred customer. We’ve got a long ways in front of us, and a lot of positive future.

Justin Ruiss – Sidoti

And then just lastly. Maybe it’s too early to tell, but is there anything maybe in the pipeline for new products being developed?

Doug Robinson

Yes, there is. As I’ve said publicly before, we are in the healthy living space. And we also believe we’re – we are and have established a leadership role in Nrf2 science, Nrf2 research. So, as you saw with our recent product launch of Canine Health, it’s a dietary supplement for dogs in – with Nrf2 front and center. We have a long ways to go in the healthy living space. But you can be assured that each of our new products that we come out with will be scientifically validated, unique to LifeVantage, absolutely essential to our preferred customers and our distributors.

But today, with only three products; Protandim, TrueScience, Canine Health, we’ve got a long ways to go also. And we will grow our products organically and inorganically. We’ll do it with our own science and research and development. But we’re also looking very closely at opportunities where other companies, frankly, that remind me a lot of our company four or five years ago, might be out there with tremendous scientifically validated products in the healthy living space.

But those companies might not have found a way to the marketplace. They haven’t figured out how to take those great products out in the marketplace. We’re being introduced to many, many companies like this that we are – we’re looking very closely at, and that might add to our product list as well.

Justin Ruiss – Sidoti

Okay. Well, that answers my questions. Thank you very much.

Doug Robinson

Thanks, Justin. Appreciate it.


And we’ll take our next question from Jim Galloway of Galloway Enterprises.

Doug Robinson

Hi, Jim.

Jim Galloway – Galloway Enterprises

Hi, Doug. You were just talking about new products and science and everything. There were enthusiastic comments about the new Chief Science Officer when she joined the company last fall, but no mention of the fact she departed after over – only several months. What transpired, and how is the lack of a Chief Science Officer affecting the company? And what’s the job description of the Chief Science Officer and the budget for that department?

Doug Robinson

Let me try to hit all of your questions, Jim. You’re absolutely right. We made an announcement last October for a start date in November of a new Chief Science Officer. And after only five months or so, it was determined, really, by our Chief Science Officer, that she’d like to go back and pursue consulting, which is the world that she came from before she joined us. And so we honored that resignation and we parted ways.

Effective immediately with that resignation, we set about looking for a new Chief Science Officer. We are a company, as you well know from previous conversations, we’re a company that is rooted in our science. And by all means, we want a Chief Science Officer here, in place, and for the long term. So we are going about the search nationally right now for a new Chief Science Officer, and we have high standards. We need someone that is very familiar with the dietary supplement space, very familiar with the healthy living space. And we’re going about that search right now.

So when we have something to announce, we certainly will, publicly. I can’t really answer a couple of your – your last parts of your questions around what the budget is for that position, or what have you. But suffice it to say, we’re looking very hard for that – for that position right now.

Jim Galloway – Galloway Enterprises

Okay. Thank you. I see how margins are going to be reduced a little bit by the new MyLifeVentures and deep promotions, but I think it’s well worth it. Sounds like a great program. That’s all I have. Thanks.

Doug Robinson

Thanks, Jim. We’re very, very excited about MyLifeVentures program. As you know, or may know, we just launched it at our April Global Convention.

It was incredibly well received. And subsequent to that convention, which really was only a couple weeks ago, we’ve had some of our senior-most distributors, our Master Pro 10s, touring the country and visiting small towns, medium-sized towns, large towns alike, all over the country.

And there is an incredible enthusiasm around the program, around the company. Really, a renewed energy and enthusiasm that we, frankly, haven’t seen in quite some time. So we’re incredibly excited about it on a go-forward basis. Thanks for your questions.


(Operator Instructions). And we’ll take our next question from Bradley Donner of J.P. Turner.

Bradley Donner – JP Turner

Hi, guys. Congratulations on a good quarter.

Doug Robinson

Thank you very much.

Bradley Donner – JP Turner

I’m kind of new to your company. If you can maybe help me out a little bit with the rollout of Japan, you guys seem to be fully engaged in that. You mentioned that there’s other markets you want to penetrate in the Far East. Could you maybe give me some color on what you’re looking to go after next, and what the plans are and the timetable for that?

Doug Robinson

Sure. Let me try to provide as much information as I can before we’re ready to announce a specific launch or launches. But suffice it to say, we have two very solid infrastructures built now for the company; one in North America, here at our Utah headquarters, corporate headquarters, and the second now is in Tokyo, Japan.

So future expansion, certainly, in the near term, makes the most sense in one or both, frankly, of those two hemispheres. So look for expansion in North America and expansion in Asia Pacific, where we have operations now.

Keep in mind, just last December, six months ago, we opened Hong Kong, clearly, in the Asia Pacific area. Earlier in 2012, we opened Australia, also in Asia-Pacific. We are looking, as we said in our prepared remarks, at other markets within those two hemispheres, if you will, and jurisdictions.

And we go about the due diligence of entering a country very, very thoroughly. We look at how our products would meet regulatory approval in those countries. We look at the cultural aspects of marketing our products through Network Marketing, our shows and go-to-market strategy.

We look at industry leaders in-country and also supported from our current marketplaces. It might be able to help us launch into a country successfully from day one. As you can imagine and appreciate, that due diligence is time-consuming. But it’s worth it for us, since we have so much in front of us, to do this right. In every market that we’re in, in every prospective market that we’re considering, we go about this in a very, very concerted way.

Bradley Donner – JP Turner

Okay. Now you mentioned that you – six months ago, you opened Hong Kong. And then, also, within the last several months, you’ve also opened Australia. Are those offices functioning in as much capacity as the office in Japan, or no?

Doug Robinson

No. Great question. Great follow-on question. Importantly – and this is exactly how we opened Japan, we opened in – I don’t want to get too technical with the response. But we didn’t open Japan right out of the gate with an on-the-ground presence, with an office, with staff, et cetera. In fact, we functioned in Japan for nearly three years on what’s called a not-for-resale basis. So we supported it from afar, from the United States, without an infrastructure.

That’s exactly how we’re supporting Australia right now. And in Hong Kong, we have one employee. So, nowhere near the infrastructure that we have here in the United States or in Tokyo. Nor do I anticipate, in some of those countries, ever building a presence anywhere close to what we have here in the United States, or in Tokyo, for that matter.

We will always support appropriately so that we can support the distributors in-country and, ultimately, the preferred customers in-country successfully. But never over-build, if you will, especially in a redundant way, where we can support from nearby, if you will.

Bradley Donner – JP Turner

Okay. So we don’t see any future plans on really broadening our horizons beyond Tokyo, at least not in the next six to 12 months.

Doug Robinson

I think that’s a fair – a fair statement.

Bradley Donner – JP Turner

Okay. All right. Thanks.

Doug Robinson

Thank you.


And our final question will come from Al Doney.

Al Doney

Hi. David, I was wondering if you could tell me the terms of the line of credit that you guys have for issuing the buybacks, and a little more color around that.

Dave Colbert

Sure. Really, about all I can offer up as color is that we’re working with D.A. Davidson and going out. And, frankly, we’re in the process of negotiating term sheets. So at this point, it’s premature to give the exact terms and conditions of what we’re looking at. But suffice it to say, we are targeting $30 million to $40 million for the sole purpose of share repurchases.

Al Doney

Thank you.


And that does conclude our question-and-answer session today. I’ll turn the conference back over to our presenters for any additional or closing comments.

Doug Robinson

Thank you. And thank you, for your participation on today’s call and, importantly for 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.

We’re a stronger company today than we were at the beginning of this fiscal year, and we’re very excited about our future. We look forward to seeing many of you at our upcoming investor events and speaking with you next on our year-end call this coming September. Thank you very much.


And that does conclude today’s teleconference. Thank you all for your participation.

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