FitLife Brands, Inc. 2021 Form 10-K Summary
Business context and reporting period
FitLife Brands, Inc. is a nutritional-supplement company headquartered in Omaha, Nebraska. Its NDS brands are distributed primarily through GNC franchise and corporate stores, while iSatori brands are sold through more than 17,000 specialty, mass-market and online locations. The report covers the fiscal year ended December 31, 2021, with comparative 2020 figures generally presented as restated. The Form 10-K was filed October 13, 2022.
In April 2021, the Company acquired substantially all assets of Nutrology for total consideration of $529,000, including $222,000 of identifiable intangible assets and $133,000 of goodwill. In December 2021, the Company completed a 4-for-1 forward stock split.
Key financial metrics
| Metric | 2021 | 2020, as restated | Change |
|---|---|---|---|
| Revenue | $27.913 million | $22.111 million | +26% |
| Gross profit | $12.504 million | $9.537 million | +31% |
| Gross margin | 44.8% | 43.1% | +170 bps |
| Income from operations | $6.230 million | $4.346 million | +43% |
| Net income | $5.410 million | $8.825 million | -39% |
| Basic EPS | $1.23 | $2.08 | Decline primarily due to 2020 tax benefit |
| Diluted EPS | $1.13 | $1.94 | Decline primarily due to 2020 tax benefit |
| Adjusted EBITDA | $6.994 million | $4.462 million | +57% |
| Cash flow from operations | $4.480 million | $5.721 million | -22% |
| Cash balance | $9.897 million | $6.336 million | +$3.561 million |
| Working capital | $13.626 million | $7.615 million | +$6.011 million |
Operating expenses increased 21% to $6.274 million. General and administrative expense increased primarily because of $374,000 of additional stock compensation and $253,000 of acquisition-related costs. Selling and marketing expense increased to $2.564 million, principally due to higher cooperative marketing expense with a wholesale partner. Online sales represented approximately 24% of 2021 revenue versus approximately 20% in 2020.
Inventory increased to $6.520 million from $3.529 million, including finished goods inventory of $5.908 million, as the Company built inventory to mitigate COVID-19-related supply-chain disruptions. Product-return and sales-incentive reserves increased to $632,000 from $345,000.
Debt, liquidity and capital resources
The Company had no balance outstanding under its secured $2.5 million revolving line of credit at December 31, 2021. The facility bears interest at one-month LIBOR plus 2.75%; the filing states that its maturity was subsequently extended to December 23, 2022. The $449,700 PPP loan received in 2020, including accrued interest, was forgiven in January 2021.
Cash used in investing activities was $529,000 for the Nutrology acquisition. Cash used in financing activities was $390,000, including $444,000 for common-stock and option repurchases, partially offset by $54,000 from option exercises. Management stated that operating cash flow, existing cash and available credit were expected to satisfy liquidity needs for the next twelve months, but acknowledged that no assurance exists if operating cash flow or credit availability deteriorates.
Material changes versus the prior comparable period
- Revenue growth reflected continued wholesale growth and expansion of online direct-to-consumer sales.
- Gross margin improved because of a larger mix of higher-margin direct-to-consumer sales.
- Operating income increased substantially, while net income declined because 2020 included a $4.415 million income-tax benefit, principally from releasing a valuation allowance on deferred tax assets.
- Adjusted EBITDA increased to $6.994 million from $4.462 million, although the measure excludes stock compensation, acquisition costs and other items and is not a GAAP measure.
- Operating cash flow declined as the Company invested in inventory and other working capital.
- GNC remained the dominant customer, accounting for approximately 71% of total sales in both 2021 and 2020. GNC represented approximately 74% of accounts receivable at December 31, 2021.
- The Company repurchased 36,092 common shares at an average price of $7.13 and purchased 50,840 employee options for $184,000. Approximately $3.17 million remained available under the repurchase authorization at year-end.
Restatement, controls and unusual items
The Company restated previously issued 2019 and 2020 annual financial information and interim periods in 2019, 2020 and 2021. The principal error involved recognizing revenue upon shipment rather than upon delivery for customers with standard FOB-destination terms. Corrections affected revenue, cost of goods sold, accounts receivable, inventory, income taxes and related internal controls.
Management concluded that disclosure controls and internal control over financial reporting were ineffective as of December 31, 2021 because of material weaknesses involving the control environment, risk assessment, control activities, information processing and communication, and monitoring. The weaknesses resulted in reporting errors requiring restatement. Management reported hiring accounting consultants and a new CFO in 2022 to support remediation; these actions occurred outside the reporting period.
Other unusual items included $453,000 of PPP-loan forgiveness income in 2021 and the $4.339 million release of a deferred-tax-asset valuation allowance recorded in 2020. The Company reported no material litigation and no goodwill impairment charges in 2021.
Outlook and principal risks
Management expects online revenue to continue increasing relative to prior periods and views e-commerce and expanded GNC distribution as important growth avenues. Management also expects the higher level of cooperative marketing expense to continue for the foreseeable future. No formal revenue, earnings or margin guidance was provided.
- Dependence on GNC, which accounted for 71% of sales and a substantial portion of receivables.
- Supply-chain, raw-material and manufacturing disruptions, including continuing effects of COVID-19.
- Extensive FDA, FTC and other domestic and international regulation of ingredients, labeling, product claims, manufacturing and distribution.
- Product returns, recalls, contamination, product-liability claims and adverse publicity.
- Intense competition and reliance on third-party manufacturers and suppliers.
- Potential limitations on the use of approximately $15.3 million of federal NOL carryforwards, including approximately $2.557 million of iSatori NOLs that management expects may not be usable before expiration.
- Material weaknesses in internal controls and the risk that remediation may be incomplete or ineffective.
- Limited liquidity and trading volume in the OTC Pink market, concentrated ownership, and no expected cash dividends.
Most important facts for investors to verify
- Verify the restated 2019, 2020 and 2021 interim financial information and confirm that revenue-cutoff corrections are fully reflected in reported results.
- Assess whether the identified material weaknesses were remediated and whether subsequent filings report effective disclosure and financial-reporting controls.
- Monitor GNC sales, receivables concentration and any changes in GNC’s purchasing or distribution arrangements.
- Evaluate inventory growth, sell-through, product-return reserves and potential obsolescence as supply-chain conditions normalize.
- Confirm the status, availability and maturity of the $2.5 million revolving credit facility after December 23, 2022.
- Reconcile reported GAAP earnings and operating cash flow to adjusted EBITDA, including the effects of PPP forgiveness, stock compensation and acquisition costs.
- Review the realizability and expiration limitations of deferred tax assets and NOL carryforwards.