FitLife Brands, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. develops and sells nutritional supplements under the NDS and iSatori brand families. Products are distributed primarily through GNC stores and more than 17,000 specialty, mass-market, and online locations. The company trades on OTCQX under “FTLF.” This unaudited filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $6.158 million | $6.151 million | Flat; up $7,000 |
| Gross profit | $3.077 million | $2.737 million | Up 12% |
| Gross margin | 50.0% | 44.5% | Up 550 basis points |
| Operating income | $1.543 million | $1.321 million | Up 17% |
| Net income | $1.684 million | $1.428 million | Up 18% |
| Basic EPS | $1.56 | $1.36 | Up $0.20 |
| Diluted EPS | $1.43 | $1.27 | Up $0.16 |
| Adjusted EBITDA | $1.682 million | $1.361 million | Up 24% |
| Cash provided by operations | $289,000 | $1,000 | Up $288,000 |
Net margin was approximately 27.3% in Q1 2021 versus 23.2% in Q1 2020. Operating margin was approximately 25.1% versus 21.5%.
Balance Sheet, Debt, and Liquidity
- Cash increased to $6.625 million at March 31, 2021 from $6.336 million at December 31, 2020.
- Accounts receivable increased to $2.372 million from $2.044 million, while inventories increased to $4.738 million from $3.401 million.
- Total assets were $18.349 million, compared with $16.774 million at year-end 2020.
- Positive working capital was approximately $9.441 million, up from $7.744 million at December 31, 2020.
- Total liabilities declined to $4.500 million from $4.740 million. The $453,000 PPP loan liability was eliminated after forgiveness in January 2021.
- The company had no balance outstanding under its $2.5 million secured revolving line of credit at March 31, 2021. The facility matures September 23, 2021, bears interest at one-month LIBOR plus 2.75%, subject to a 75-basis-point LIBOR floor, and is secured by company assets.
- Management expects operating cash flow, existing cash, and available line-of-credit borrowings to fund operations for the next twelve months, but states that no assurance can be given.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially unchanged, but online sales rose to 26% of revenue from 14%, while GNC sales declined to 66% of revenue from 76%.
- Cost of goods sold declined 10%, primarily due to the higher-margin online sales mix, driving the gross-margin expansion.
- General and administrative expense increased 17% to $857,000, primarily due to $131,000 of stock and option compensation recorded in the quarter.
- Operating expenses increased 8% to $1.534 million, while selling and marketing expense remained approximately flat at $669,000.
- Net income benefited from the $453,000 gain on forgiveness of the PPP loan. Q1 2020 included a $70,000 gain on settlement. Excluding these non-recurring gains and equity-based compensation, adjusted EBITDA increased to $1.682 million from $1.361 million.
- Income tax expense was $318,000 in Q1 2021, compared with a $41,000 tax benefit in Q1 2020. The company reported approximately $20.0 million of federal NOL carryforwards and a deferred tax asset of approximately $4.2 million, partially offset by a $537,000 valuation allowance.
- Operating cash flow improved substantially but remained well below reported net income, partly reflecting increases in accounts receivable and inventory.
Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide formal revenue or earnings guidance in the filing.
- COVID-19-related store closures and restrictions previously hurt operations, although online sales and more recent demand offset much of the impact. A resurgence could reduce demand or disrupt supply chains and manufacturing lead times.
- GNC represented 66% of Q1 revenue and 87% of gross accounts receivable at March 31, 2021, creating significant customer-concentration and credit-collection exposure.
- The company reported no material litigation and no defaults on senior securities.
- No goodwill impairment triggering event was identified during the quarter; worsening COVID-19 conditions could result in future impairment charges.
- On February 26, 2021, the company adopted a Tax Benefits Preservation Plan intended to protect approximately $20.0 million of NOL carryforwards by deterring ownership changes involving acquisitions of 4.9% or more of company securities.
- The board authorized up to $5.0 million of repurchases over 24 months; no securities were repurchased during Q1. In April 2021, the company repurchased approximately $443,000 of options and common stock.
- After quarter-end, on April 7, 2021, the company purchased substantially all assets of Nutrology, a plant-based and natural nutritional supplement business. The filing does not provide the purchase price or expected financial contribution.
- As of March 31, 2021, the company had 1,090,818 common shares issued and outstanding; 1,095,690 shares were outstanding as of May 13, 2021.
Important Facts for Investors to Verify
- Whether the higher online-sales mix is sustainable and can offset continued dependence on GNC.
- The timing and terms of renewal or replacement of the revolving credit facility maturing September 23, 2021.
- Inventory growth of approximately 39% from year-end and its implications for working capital, obsolescence, and cash conversion.
- The extent to which Q1 net income and EBITDA benefited from the non-recurring $453,000 PPP forgiveness gain.
- The purchase price, financing, integration requirements, and expected revenue and profitability of the Nutrology acquisition.
- The realizability of the approximately $4.2 million deferred tax asset and the company’s ability to use its NOL carryforwards without an ownership change.
- Potential effects of COVID-19-related supply-chain disruptions, retail closures, manufacturing delays, or changes in consumer demand.