Is LifeVantage Playing Musical Chairs With Its Auditors?

Price Target $6.00

September 20, 2016 6:53 AM EDT

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(SI Newswire) On November 18, 2015, we published a research report on GNC Holdings, Inc. (NYSE: GNC) entitled: "GNC and Its Unconscionable Sales." The report discussed Oregon Attorney General Ellen Rosenblum’s lawsuit against the GNC claiming the company misrepresented the health benefits of certain of its dietary products and that they were sold in an unconscionable manner knowing they were harmful. On that date, the stock price closed at $28.69. Yesterday, the stock closed at $20.72, bouncing off a 52-week low of $18.92 early last month. To some extent, we’d like to believe the market saw value in our research.

Similar to the extraordinary and sometimes bizarre issues surrounding GNC, Herbalife (NYSE: HLF), and Nu Skin (NYSE: NUS), LifeVantage Corp (NASDAQ: LFVN) is facing many special issues surrounding not just its products, but also concerning its financials and its claims of great health and longevity for the consumer and his/her dog. We will discuss each of these issues in greater detail below:

1. Multiple Changes of Auditors Recently:

We reviewed LifeVantage’s annual financial statements (forms 10-K) filed with the SEC from 2008 to 2015. On January 30, 2008, the company retained the audit firm of EKS&H, LLLP (a firm with over 60 partners and 650 employees) as its independent registered public accounting firm beginning with the three months ended December 31, 2007. The company used EKS&H from FY 2007 through the filing of its 2015 annual report on September 1, 2015. On or about April 12, 2016, the company fired EKS&H.

On April 12, 2016, the company hired BDO USA, LLP as its new independent public accounting firm. According to the company’s press release, “The decision to appoint BDO followed the Audit Committee’s comprehensive review of audit proposals from firms with the resources to support the company’s broadening global footprint…BDO has the scale and experience to support LifeVantage’s growth for years to come.” BDO is among the top 10 largest accounting firms in the US.

Less than three months later, on July 7th, the company announced its termination of BDO effective immediately because “a firm in the BDO international network had provided certain prohibited non-audit services as a subcontractor to a third party contractor who had been engaged to provide payroll services to an international subsidiary of the Company.”

A few days later on July 11th, LFVN retained WSRP, LLC as its new independent auditor. WSRP is a Utah-based CPA firm with approximately 14 partners and less than 100 employees. The company’s primary reason for hiring BDO in April was to hire a firm large enough to “support the company’s broadening global footprint.” If that’s the case, why then is the company now hiring a much smaller firm than both BDO and EKS&H? We will let the reader chew on that particular piece of cud and make a determination for him or herself.

On July 15th, the U.S. Federal Trade Commission (FTC) announced that Herbalife must restructure its multi-level marketing operations and pay $200 million for consumer redress to settle the FTC charges. The FTC also stated that the company must tie distributor rewards to verifiable retail product sales and stop misleading consumers about potential earnings. Yesterday, we learned that famed billionaire investor Carl Icahn did in fact try to shop his 21% stake in Herbalife during the summer but could only get $51.50 per share, a roughly 20% discount to where the stock was trading at the time. Other large investors such as George Soros had previously exited the trade.

About a month later, on September 13th, LifeVantage announced that it will have to delay the filing of its 4th quarter 2016 and FY 2016 financial statements due to “accounting issues.” If the company thought it could play musical chairs with its auditors until it found a firm that was too small and inexperienced to address these accounting issues appropriately, it got a very rude awakening last week.

2. Company Trading at a Significant Premium to Peers:

Compounding the accounting issue, LifeVantage is trading at a fairly steep premium to its peers in the MLM/nutritional supplement sector.

Yesterday, GNC closed at $20.72, creating a 12-mo trailing P/E ratio of 7.40. If LifeVantage were trading with a similar P/E based upon its last four quarters of earnings, it would be trading at a price of $1.92.

Next we have Herbalife which closed at $61.44 yesterday, creating a 12-mo trailing P/E ratio of 21.11. If LifeVantage were trading with a similar P/E based upon its last four quarters of earnings, it would be trading at a price of $5.49 (it would be trading for far less if the reader considers that HLF is trading at an unwarranted premium).

Similarly, Nature’s Sunshine (NASDAQ: NATR), another small cap entity similar to LifeVantage, closed at $14.89 yesterday, creating a 12-mo trailing P/E ratio of 25.67. If LifeVantage were trading with a similar P/E based upon its last four quarters of earnings, it would be trading at a price of $6.67.

LifeVantage is trading at a significant premium over its U.S. peers. What about over Chinese peer Nu Skin? Yesterday, NUS closed at $59.67, creating a 12-mo trailing P/E ratio of 31.74. If LifeVantage were trading with a similar P/E based upon its last four quarters of earnings, it would be trading at a price of $8.25.

We believe LifeVantage is most comparable to its slightly larger small cap competitor Nature’s Sunshine, implying the company should rationally be trading in the $6.67 range. Discounting this price by a modest 10 percent due to the “accounting issues” overhang, we arrive at a fair value of $6.00 for LifeVantage’s stock price.

3. Flagship Product NOT Created by a Scientist as Claimed:

Another issue overhanging the stock it its product claims which are misleading at best and outright untrue at worst. LifeVantage’s website claims that Dr. Joe McCord is “the scientist behind Protandim,” the company’s flagship product. The current version of Protandim is in fact a combination of 5 common herbal ingredients including turmeric and green tea. It was invented following “months of extensive research and development” in 2004 by Lifeline (the precursor to LifeVantage) employees Paul Myhill and William Driscoll, a former oil company executive, who together hold the patent on the product. The product was launched in February of 2005. Later that year, Myhill and Driscoll resigned from the company. The following year, biochemist Dr. Joe McCord joined the LifeVantage board of directors as its Director of Science. Dr. McCord served as spokesperson for Protandim and was responsible for distributor training and product research.

On April 13th, 2012, Paul Myhill published an open letter on Facebook saying, LifeVantage’s "communications are downright false and misleading", and "perpetuate an ongoing fraud - one that the SEC and FTC should be made aware of." To prove that his words weren't empty threats, Myhill posted proof in the form of a letter from McCord himself saying that he couldn't take credit for inventing Protandim, because "it was so close to its final embodiment prior to the beginnings of our association." This showed that McCord didn't take 41 ingredients and whittle it down to 5 as he had claimed.

During his tenure with the company, Dr. McCord co-authored 12 studies on Protandim, almost all of which are on mice or rats or in test tubes. The website specifically explains that animal tests “cannot provide definite proof that a particular treatment works,” so we will not make too much of the company’s claims based primarily on non-human participants. Additionally, the one human study presented on the LifeVantage website is fraught with evidence of data of which is the fact that the company used company insiders and investors in that particular study.

4. No Results For Clinical Trials on Humans:

What really inspires angst with us is the information regarding Protandim at the website The site includes 4 actual human clinical trials which are listed below with the corresponding results for each:

A. The Effect of Protandim on Non-alcoholic Steatohepatitis (NASH) from September of 2009. The purpose of this study was to evaluate the effect of Protandim on the degree of liver injury after one year of Protandim supplementation. The study, sponsored by the University of Colorado at Denver, was completed. Results: No Study Results Posted on Clinical for this Study.

B. The Effect of Protandim Supplementation on Oxidative Damage and Athletic Performance from June of 2014. The purpose of this study was to examine the effect of about a 90 day Protandim supplementation on 5-km running performance and on acute and long term oxidative damage as assessed by blood markers. Secondarily, another purpose of this study was to examine the effect of Protandim supplementation on other blood parameters (such as antioxidant enzyme concentrations) and measures of quality of life. The study, sponsored by the University of Louisville, was completed. Results: No Study Results Posted on Clinical for this Study.

C. Protandim and the Metabolic Syndrome from May of 2010. The purpose of the study was to determine if Protandim would decrease markers of oxidative stress/inflammation in subjects with metabolic syndrome and was sponsored by SomaLogic, Inc. The study was withdrawn prior to enrollment.

D. Antioxidant Replacement Therapy in Patients With Alcohol Abuse from July of 2009. The company hypothesized that antioxidant deficiency is a cause of abnormal alveolar-capillary barrier function in individuals with a history of chronic alcohol abuse, and oral anti-oxidant replacement therapy will correct the abnormality. The study, sponsored by the University of Colorado at Denver, was completed. Results: No Study Results Posted on Clinical for this Study.

Protandim doesn’t seem to be the panacea for all ills as the company would have you believe. Rather, the 4 failed clinical trials suggest the compound is ineffective at best in humans and harmful at worst. There are absolutely no clinical trials to show that the company’s product will extend life, give more youthful skin, or help your dog. To top it all off, the company’s shares are trading at a significant premium above its peers. Given all of the above, a price target of $6.00 is more than generous.

About us: Street Watchdog Research comprises a small group of investors, analysts, & short sellers based in Scottsdale, AZ. Our team includes Maxwell Athanis, Timothy Diggs, Cynthia Wayne, Angelene Dunlap, and Marissa Cabrera.

Disclosure: We are short LFVN. We do not have a financial relationship with the company.

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