FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018; filed August 14, 2018. Financial statements are unaudited. FitLife sells nutritional supplements under NDS, iSatori and other brands, with significant distribution through GNC and more than 25,000 specialty, mass-market and online locations. The common stock trades on OTC:PINK under FTLF.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4.379 million | $5.022 million | $8.993 million | $10.612 million |
| Gross profit | $1.806 million | $1.523 million | $3.722 million | $3.444 million |
| Gross margin | 41.2% | 30.3% | 41.4% | 32.5% |
| Operating income (loss) | $214,000 | $(517,000) | $452,000 | $(824,000) |
| Net income (loss) | $170,000 | $(551,000) | $388,000 | $(884,000) |
| Basic and diluted EPS | $0.02 | $(0.05) | $0.04 | $(0.08) |
| Cash flow from operations | Not separately provided | Not separately provided | $882,000 | $424,000 |
- Cash was $940,000 at June 30, 2018, down from $1.262 million at December 31, 2017.
- Working capital was approximately $913,000, compared with $369,000 at year-end 2017. Current assets were $5.627 million and current liabilities were $4.714 million.
- Accounts receivable totaled $1.848 million, including $1.466 million of factored receivables. Inventory was $2.757 million.
- The former U.S. Bank line of credit and term loan, totaling $2.365 million at December 31, 2017 and previously in default for covenant noncompliance, were fully repaid in January 2018.
- At June 30, 2018, the Company reported no U.S. Bank debt but had a $1.159 million secured payable to its factor.
- Six-month financing cash outflows were $1.206 million, including repayment of the line of credit and term loan; investing activities provided $2,000.
- Stockholders’ equity increased to $1.417 million from $912,000 at December 31, 2017. Shares outstanding increased to 10,997,958 from 10,681,710, primarily from issuing 316,248 shares for services.
Material Changes Versus the Prior Comparable Period
- Revenue declined 12.8% in the quarter and 15.3% year to date, reflecting lower GNC traffic, lower retail unit sales and GNC inventory adjustments.
- Gross profit increased despite lower sales, and gross margin expanded by 10.9 percentage points in the quarter and 8.9 percentage points year to date. Management attributed the improvement primarily to lower vendor-funded discounts, reduced returns and lower write-offs.
- General and administrative expense decreased 15.2% in the quarter and 21.2% year to date, driven by cost reductions, lower headcount and facility subletting. Selling and marketing expense decreased 21.4% and 18.2%, respectively.
- Depreciation and amortization declined substantially because certain intangible assets were written off in the fourth quarter of 2017.
- The Company moved from losses to profitability: year-to-date net income was $388,000 versus a $884,000 loss in 2017.
- Operating cash flow increased to $882,000 from $424,000, substantially affected by changes in receivables and the factoring arrangement.
Outlook, Liquidity, Risks and Unusual Items
- Management stated that retail and GNC trends may have stabilized, although no assurance was provided. Online sales increased and management is pursuing an omnichannel strategy; online and related channels were not yet material to total sales.
- Management expects cash from operations and existing resources to meet liquidity needs for the next 12 months, but the Company is dependent on operating cash flow and continued access to receivables factoring.
- Under the Compass Merchant Agreement, receivables are factored with recourse and secured by substantially all inventory, receivables and other collateral. During the first six months, the Company factored $8.152 million of invoices for $7.784 million of cash proceeds and incurred $61,000 of fees and charges recorded in interest expense.
- The Compass arrangement carries a Company guarantee of up to $5.0 million, with pricing based on LIBOR plus 550 basis points and additional non-utilization fees. The filing states that the June 30, 2018 LIBOR rate was 2.1%.
- If the Company cannot generate positive operating cash flow or obtain additional factoring capacity, it may require additional working capital. Management stated it did not then intend to raise additional equity or debt.
- GNC represented 80.3% of gross sales for the six months ended June 30, 2018, compared with 81.9% in the prior year, indicating substantial customer concentration.
- An active lawsuit, Ryan et al. v. Gencor Nutrients, Inc. et al., concerns alleged misleading claims regarding Testofen in nutritional supplements. The Company uses Testofen in a limited number of products and states that an adverse decision could materially affect its financial condition or results.
- The Company adopted the new revenue recognition standard effective January 1, 2018, with no quantitative impact reported. It was evaluating the effect of the new lease standard effective for periods beginning after December 15, 2018.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2018. The filing contains no independent auditor attestation of internal controls.
Key Facts Investors Should Verify
- Whether declining GNC sales and retail traffic have actually stabilized and whether online growth can offset continued retail weakness.
- The sustainability of the 41.4% year-to-date gross margin and whether reduced discounts, returns and write-offs are recurring benefits.
- Continued availability, borrowing capacity, fees and recourse exposure under the Compass factoring arrangement.
- Whether operating cash flow remains positive after factoring activity and whether the $940,000 cash balance is adequate for ongoing needs.
- GNC concentration, customer receivable exposure and the effect of further GNC inventory reductions.
- The status and potential financial exposure of the Testofen litigation.
- Potential dilution from 687,087 outstanding options, 43,300 warrants and additional shares issued for services.