Business Context and Reporting Period
FitLife Brands, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018, with comparative results for 2017. The company develops and sells nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories and Energize. Products are sold through GNC, specialty and mass retailers, online channels and more than 25,000 retail locations for iSatori products. The company operates as one reportable segment and trades on the OTC:PINK market under FTLF.
GNC remained the dominant distribution channel, accounting for approximately 77% of 2018 revenue and 82% of accounts receivable before return reserves. The company had 26 full-time employees at December 31, 2018.
Financial Results and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $17.077 million | $17.799 million | Down 4.2% |
| Gross profit | $6.745 million | $5.091 million | Up 32% |
| Gross margin | 39.5% | 28.6% | Up 10.9 percentage points |
| Operating income (loss) | $653,000 | $(8.952) million | Improved $9.605 million |
| Net income (loss) | $509,000 | $(9.761) million | Improved $10.270 million |
| Net income available to common shareholders | $404,000 | $(9.761) million | Improved $10.165 million |
| Basic and diluted EPS | $0.04 | $(0.93) | Improved |
| Cash flow from operations | $258,000 | $666,000 | Down $408,000 |
| Cash flow from investing | $4,000 | $(185,000) | Improved $189,000 |
| Cash flow from financing | $(1.265) million | $(512,000) | More cash used |
Operating margin was approximately 3.8% in 2018, compared with a substantial operating loss in 2017. Adjusted EBITDA was $1.014 million in 2018 versus $(2.482) million in 2017; the company identifies this as a non-GAAP measure.
At December 31, 2018, cash was $259,000, accounts receivable were $1.433 million, inventory was $3.523 million and working capital was $1.890 million, compared with $369,000 in 2017. Total assets were $5.862 million and stockholders’ equity was $2.314 million. Current liabilities were $3.548 million, including $500,000 of related-party notes payable.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower retail traffic, lower same-store sales and inventory adjustments at GNC. Increased online sales partially offset the decline.
- Gross margin increased materially because of reduced product returns and vendor-funded discounts.
- General and administrative expense decreased 20% to $3.333 million, principally from cost reductions, lower facility expense and reduced headcount and payroll costs.
- Selling and marketing expense decreased 24% to $2.690 million due primarily to budgetary controls.
- The company recorded no impairment charge in 2018, compared with a $5.929 million impairment of iSatori goodwill and intangible assets in 2017.
- The company repaid the U.S. Bank line of credit and term loan totaling $2.365 million in January 2018. These facilities were fully paid at year-end.
- Accounts receivable decreased from $1.958 million to $1.433 million, while inventory increased from $2.874 million to $3.523 million.
- The company adopted the new revenue-recognition standard on January 1, 2018, with no quantitative effect on the financial statements.
Guidance, Outlook, Risks and Unusual Items
- Management expects to launch a similar number of new and reformulated products in 2019 as in 2018, when 18 products were introduced or reformulated.
- Management is emphasizing e-commerce and direct-to-consumer capabilities to offset secular declines in traditional retail. Online sales were not material as a percentage of 2018 revenue but are viewed as a longer-term growth opportunity.
- Liquidity remains dependent on positive operating cash flow. Management stated that cash, the recent capital raise and related-party notes were expected to provide sufficient capital for the next twelve months, but expressly stated that no assurance could be given.
- In November 2018, the company sold 600 units of newly designated Series A Convertible Preferred Stock for gross proceeds of $600,000. The preferred stock accrues a 12% annual dividend, is convertible at an initial price of $0.46 per common share and has senior liquidation, voting and protective rights. The financing also included warrants for 391,304 common shares exercisable at $0.46 per share through November 2023.
- The preferred financing generated a $105,000 deemed dividend and $9,000 of undeclared cumulative dividends at year-end, reducing income available to common shareholders.
- On December 26, 2018, the company issued a $600,000 line-of-credit note to Sudbury Capital Fund, affiliated with CEO and Chairman Dayton Judd, with an initial $300,000 advance, and a separate $200,000 note to Mr. Judd. The notes bear 9% interest, mature on the earlier of a change in control or December 31, 2019, and require monthly principal and interest payments beginning April 1, 2019.
- The company terminated its Compass merchant-factoring arrangement after settling approximately $590,000 of outstanding obligations. Compass had factored $14.6 million of receivables during 2018 and charged $128,000 of factoring fees included in interest expense.
- The principal risks include GNC customer concentration, competition, declining traditional retail traffic, regulatory and product-claim exposure, product liability and recalls, reliance on third-party manufacturers, inventory and return estimates, limited liquidity, related-party financing and potential dilution from preferred stock, warrants and options.
- An active lawsuit alleges misleading claims concerning Testofen products. The company uses Testofen in a limited number of products and states that the litigation could adversely affect its financial condition or results of operations.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the smaller-reporting-company exemption means the auditor did not provide an internal-control attestation.
Most Important Facts for Investors to Verify
- Whether GNC revenue and receivables concentration declines or remains near 2018 levels, and whether GNC retail traffic continues to pressure orders.
- Whether the 39.5% gross margin is sustainable after the 2018 reduction in returns and vendor-funded discounts.
- Whether operating cash flow can fund working capital and the required 2019 repayment of the related-party notes, particularly given year-end cash of only $259,000.
- The outstanding balance, repayment schedule and availability under the Sudbury line-of-credit note, including the distinction between its $600,000 principal commitment and $300,000 initial advance.
- The economic impact, conversion terms and dilution potential of the 600 Series A preferred shares, 391,304 warrants and outstanding stock options.
- The status and potential exposure from the Testofen litigation and any regulatory actions involving product claims, labeling or safety.
- Inventory aging, obsolescence reserves and subsequent product returns, given inventory growth to $3.523 million and the company’s disclosure that returns can be material.
- Whether online and international expansion produces material revenue growth without disproportionate marketing, regulatory or fulfillment costs.