FitLife Brands, Inc. — Fiscal 2022 Form 10-K Summary
Business Context and Reporting Period
FitLife Brands provides nutritional supplements under the NDS and iSatori brand families. NDS products are sold primarily through GNC franchise and corporate stores, while iSatori products are distributed through more than 17,000 specialty, mass-market, and online locations. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. The company trades on the OTC Pink market under “FTLF.”
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $28.803 million | $27.913 million | 3% |
| Gross profit | $12.034 million | $12.504 million | (4%) |
| Gross margin | 41.8% | 44.8% | Down 300 bps |
| Operating income | $5.701 million | $6.230 million | (8%) |
| Net income | $4.429 million | $5.410 million | (18%) |
| Basic diluted EPS | $0.97 / $0.89 | $1.23 / $1.13 | Lower |
| Adjusted EBITDA | $6.705 million | $6.994 million | (4%) |
| Cash flow from operations | $4.130 million | $4.480 million | (8%) |
Cash was $13.277 million at December 31, 2022, compared with $9.897 million at year-end 2021. Working capital increased to $18.932 million from $13.626 million. Accounts receivable were $705,000, and inventory increased to $9.105 million from $6.520 million, partly reflecting efforts to maintain product availability amid supply-chain constraints.
The company had no outstanding borrowings under its $3.5 million revolving credit facility at December 31, 2022. Total liabilities were $4.319 million, primarily current operating liabilities and lease liabilities. The company reported no material off-balance-sheet arrangements.
Material Changes Versus 2021
- Revenue growth was driven by online sales, which increased to approximately 28% of revenue from 24%; wholesale revenue declined as a percentage of sales.
- GNC represented approximately 67% of revenue, down from 71%, but remained the company’s largest customer concentration. GNC accounted for 43% of accounts receivable at year-end, compared with 85% in 2021.
- Cost of goods sold rose 9%, exceeding revenue growth, due primarily to inflationary product costs and higher distribution costs associated with online sales.
- Gross margin declined because of supply-chain-related product costs. Management stated that costs had stabilized or begun to decline for certain ingredients and expected margin pressure to be temporary.
- SG&A increased modestly to $6.267 million, including higher consulting costs associated with the restatement and merger-and-acquisition activities.
- Adjusted EBITDA declined despite revenue growth, while 2021 benefited from a $453,000 gain from forgiveness of the Paycheck Protection Program loan.
- The company repurchased 48,596 common shares for approximately $772,000 and had approximately $2.399 million remaining under its repurchase authorization at year-end.
- Inventory increased materially, and the allowance for expiring, excess, and slow-moving inventory rose to $107,000 from $56,000.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects online revenue to continue increasing and believes higher-margin online sales, lower production costs, and e-commerce investments could support future margins. Management stated that cash from operations, existing cash, and available revolving credit were expected to support liquidity for the next twelve months, while acknowledging that there is no assurance this will be sufficient.
On February 28, 2023, after the reporting date, FitLife completed the acquisition of Mimi’s Rock Corp. for approximately $17.0 million, or CAD $23.2 million, including the retirement of approximately $10.4 million of MRC debt. The acquisition was financed partly with a new $12.5 million term loan and a $3.5 million revolving line of credit from First Citizens Bank. The term loan bears interest at Term SOFR plus 2.75%, matures February 28, 2028, and is secured by substantially all assets of the company and its subsidiaries. The company must maintain a fixed-charge coverage ratio of at least 1.25 to 1.00 and a funded-debt-to-EBITDA ratio of no more than 2.50 to 1.00 beginning with specified future testing periods.
- Key risks include dependence on GNC, intense competition, reliance on a limited number of suppliers and contract manufacturers, product recalls or liability claims, regulatory compliance, inflation, consumer demand, and supply-chain disruptions.
- The acquisition creates integration, execution, leverage, covenant-compliance, foreign-currency, and unknown-liability risks. The company entered into a CAD $25.0 million forward contract to manage currency exposure related to the acquisition.
- Disclosure controls and internal control over financial reporting were reported ineffective at December 31, 2022 because of material weaknesses involving the control environment, risk oversight, control activities, information processing, communication, and monitoring.
- The material weaknesses contributed to prior reporting errors and restatements involving revenue, cost of sales, accounts receivable, inventory, and income taxes. Management continued remediation efforts, including hiring accounting consultants, a new CFO, and additional accounting personnel.
- The independent auditor issued an unqualified opinion on the 2022 financial statements but identified realizability of the deferred tax asset as a critical audit matter. The net deferred tax asset was $1.847 million.
- The company reported no material litigation. Subsequent to year-end, a former employee forfeited 61,200 shares, which were cancelled.
Most Important Facts for Investors to Verify
- Post-acquisition debt balances, interest expense, liquidity, and compliance with the new bank covenants.
- Mimi’s Rock’s contribution to revenue, EBITDA, cash flow, and working capital, as well as the final purchase-price allocation and goodwill or intangible assets recorded.
- Whether online growth and lower product costs actually restore gross margin toward historical levels.
- Customer concentration, particularly continued dependence on GNC and the collectability of related receivables.
- Inventory turnover, product expiration exposure, returns, and adequacy of related reserves.
- Progress in remediating the material weaknesses and whether future filings require additional corrections or restatements.
- Realizability of the $1.847 million deferred tax asset and utilization of approximately $9.7 million of federal NOL carryforwards, including ownership-change limitations.
- Integration costs, foreign-exchange exposure, and potential undisclosed liabilities associated with the MRC acquisition.