Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter and nine months ended September 30, 2012, filed November 14, 2012. The filing identifies the registrant as Bond Laboratories, Inc. (OTCQB: BNLB), not FitLife Brands, Inc.; this company-name discrepancy should be verified. Bond Laboratories, through NDS Nutrition Products, Inc., develops and distributes nutritional supplements, predominantly through GNC franchise locations.
The interim consolidated financial statements are unaudited and prepared under GAAP. Management states that the results for the nine months ended September 30, 2012 are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2012 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 |
|---|---|---|---|---|
| Revenue | $4.59 million | $3.22 million | $14.72 million | $9.38 million |
| Gross profit | $1.63 million | $1.20 million | $5.36 million | $3.39 million |
| Gross margin | 35.6% | 37.2% | 36.4% | 36.2% |
| Operating income | $469,449 | $297,779 | $1.97 million | $809,143 |
| Net income | $467,409 | $290,571 | $1.96 million | $782,288 |
| Basic earnings per share | $0.01 | $0.00 | $0.03 | $0.01 |
Operating margin was approximately 10.2% in the quarter and 13.4% for the nine months, compared with approximately 9.2% and 8.6%, respectively, in the prior-year periods.
- Cash and cash equivalents were $1.19 million at September 30, 2012, compared with $354,929 at December 31, 2011.
- Accounts receivable was $1.40 million and inventory was $2.47 million at September 30, 2012. Inventory increased from $1.88 million at year-end 2011.
- Total assets were $6.57 million, compared with $4.82 million at December 31, 2011.
- Total liabilities were $1.34 million, compared with $1.62 million at year-end 2011. Stockholders’ equity was $5.23 million.
- The company had a $437,089 revolving line of credit, classified as current, bearing interest at 3.0% plus one-month LIBOR and maturing May 15, 2013. It is secured by specified receivables and inventory.
- Operating cash flow was $832,440 for the nine months, compared with cash used in operations of $1,546 in the prior-year period. Investing cash flow was zero and financing cash flow was zero.
- The company reported $13,936 of cash interest paid during the nine months.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased approximately 42.6%; nine-month revenue increased approximately 57.0%, driven by newer products, higher average sales per retail location, and initial international sales.
- Quarterly net income increased approximately 60.8%; nine-month net income increased approximately 150.6%.
- Gross margin declined 160 basis points in the quarter but increased 20 basis points for the nine-month period.
- General and administrative expense increased to $451,270 in the quarter and $1.57 million for the nine months, primarily due to personnel costs and legal expenses related to the Schick litigation.
- Selling and marketing expense increased to $653,151 in the quarter and $1.64 million for the nine months, reflecting expanded marketing activity and GNC convention-related product sales.
- Cash generation improved materially, although working capital absorbed cash through increases in receivables, inventory, and prepaid expenses.
- Common shares outstanding increased to 74,590,670 at September 30, 2012 from 74,171,996 at December 31, 2011. Potential dilution included Series C convertible preferred stock, options, and warrants.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected existing cash and anticipated operating cash flow to support liquidity through at least December 31, 2012 and believed operating cash flow could fund working capital needs beyond that date, although no assurance was provided.
- Management anticipated positive operating cash flow in the fourth quarter and for full-year 2012. It also expected an additional $45,000 of cash payments related to the Schick settlement through December 31, 2012.
- The company marketed 47 products through more than 900 U.S. GNC franchise locations and 10 products through GNC locations in four international countries. Management identified international expansion as a potential future growth driver.
- Approximately 1.5% of quarterly revenue came from products containing DMAA. The company reformulated and reintroduced those products without DMAA, but warned that weaker sales of reformulated products could materially affect revenue.
- The company settled the Schick litigation effective August 3, 2012 for total payments of $360,000, including $180,000 paid as a lump sum and $180,000 payable in monthly installments. A prior $250,000 litigation reserve was reduced to $40,000 at September 30, 2012.
- A separate CycloBolan product-liability lawsuit seeks initially stated damages of $500,000. The insurer assumed the defense at no cost to the company; management considered the overall risk minimal, but stated that potential loss could not yet be evaluated because discovery had not occurred.
- The company cited dependence on key customers, competition, market demand, product performance, suppliers, personnel retention, accounting changes, and product liability as risks.
- The company restored $700,000 of deferred tax valuation allowance based on expected use of net operating losses, but maintained a full valuation allowance against remaining deferred tax assets. The NOLs are subject to Section 382 limitations.
- Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2012. No external auditor attestation was included because the company qualified for the applicable small-reporting-company exemption.
Important Facts for Investors to Verify
- Confirm whether the filing belongs to FitLife Brands, Inc. or Bond Laboratories, Inc.; the supplied filing consistently identifies Bond Laboratories and NDS Nutrition Products.
- Verify the maturity, borrowing-base requirements, interest rate, and renewal or repayment status of the $437,089 line of credit due May 15, 2013.
- Assess customer concentration and dependence on GNC franchise locations, as well as the sustainability of international expansion.
- Monitor sales performance and regulatory or product-liability exposure associated with DMAA and its reformulated replacements.
- Review the remaining Schick settlement payments and the status, insurance coverage, and potential exposure of the CycloBolan litigation.
- Evaluate inventory growth relative to revenue and operating cash flow, including potential obsolescence or valuation risk.
- Consider dilution from 125 shares of Series C preferred stock convertible at $0.25 per share, 1.2 million options, and 9.23 million outstanding warrants.
- Confirm the recoverability and Section 382 limitations of the company’s net operating loss carryforwards and the potential effect of future valuation-allowance changes.