FitLife Brands, Inc. Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. is a nutritional-supplement company marketing NDS and iSatori products through GNC, more than 17,000 specialty, mass, and online retail locations, and direct-to-consumer channels. The company’s common stock trades over the counter under “FTLF.” This report covers the three and nine months ended September 30, 2022; financial statements are unaudited.
As of November 10, 2022, 4,543,957 common shares were outstanding. The company withdrew its Form 15 deregistration filing on October 14, 2022 and returned to current SEC filer status.
Financial Performance and Liquidity
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $8.314 million | $6.705 million | +24% |
| Gross profit | $3.244 million | $2.945 million | +10% |
| Gross margin | 39.0% | 43.9% | Down 490 bps |
| Operating income | $1.541 million | $1.431 million | +8% |
| Net income | $1.220 million | $1.125 million | +8% |
| Diluted EPS | $0.24 | $0.23 | +4% |
| Adjusted EBITDA | $1.875 million | $1.665 million | +13% |
| Metric | Nine months 2022 | Nine months 2021 | Change |
|---|---|---|---|
| Revenue | $23.433 million | $20.710 million | +13% |
| Gross profit | $9.846 million | $9.421 million | +5% |
| Gross margin | 42.0% | 45.5% | Down 350 bps |
| Operating income | $4.963 million | $4.725 million | +5% |
| Net income | $3.956 million | $4.162 million | Down 5% |
| Diluted EPS | $0.79 | $0.87 | Down 9% |
| Adjusted EBITDA | $5.796 million | $5.315 million | +9% |
Online sales represented approximately 26% of revenue in both the quarter and nine-month period, compared with 25% and 24%, respectively, in the prior-year periods. GNC accounted for 69% of revenue in both comparable periods, indicating significant customer concentration.
Cash provided by operating activities was $5.003 million for the nine months ended September 30, 2022, compared with $3.200 million in the prior-year period. Cash increased to $14.929 million from $9.897 million at December 31, 2021. Working capital was approximately $19.009 million.
There were no borrowings under the $2.5 million secured revolving line of credit at September 30, 2022. The maturity date was extended to December 23, 2022. Total liabilities were $5.325 million, consisting primarily of current operating liabilities and lease obligations. The company reported no material litigation.
Material Changes Versus Prior Comparable Period
- Revenue growth reflected increased wholesale and online demand, while cost of goods sold increased faster than revenue in the third quarter.
- Gross margin declined because of supply-chain-related product costs and inflationary pressure. Management stated that product costs had largely stabilized and that some ingredient costs had begun to decline.
- Third-quarter selling, general and administrative expense included $220,000 of non-recurring restatement-related costs. Nine-month expenses also included merger-and-acquisition-related costs.
- Nine-month net income declined despite higher revenue because the prior-year period included a $453,000 gain from forgiveness of the PPP loan and 2022 included restatement and M&A expenses.
- Inventory increased to $7.578 million from $6.520 million at December 31, 2021, while the inventory-obsolescence allowance increased to $203,000 from $56,000.
- All treasury shares were retired in January 2022. The company did not repurchase securities under its repurchase program during the nine months, although $3.170 million remained available under the program at September 30, 2022.
Guidance, Outlook, Risks, and Unusual Items
Management expects cash from operations, existing cash, and available line-of-credit borrowings to provide sufficient liquidity for the next twelve months, but acknowledges that this is not assured. Management currently has no intention to raise additional equity or debt capital.
Management expects online sales to continue increasing relative to prior periods because of its focus on higher-margin e-commerce sales. It also expects recent gross-margin pressure to be temporary if production costs decline and online sales become a larger portion of revenue. The filing does not provide formal numerical revenue or earnings guidance.
- Restatement and controls: Previously issued financial statements for 2019, 2020, and specified interim periods in 2019 through 2021 were restated for improper revenue recognition under FOB destination terms. Management concluded that disclosure controls and internal control over financial reporting were not effective as of September 30, 2022 because of material weaknesses involving the control environment, risk oversight, control activities, information processing, communication, and monitoring.
- Remediation: The company engaged accounting consultants and hired a new CFO in August 2022. Remediation efforts remain in progress and are not yet complete.
- Customer concentration: GNC represented 69% of revenue and 71% of gross accounts receivable at September 30, 2022.
- Supply chain and inflation: Disruptions, procurement costs, and the ability to pass price increases to customers could affect margins and operating results.
- COVID-19: A resurgence could reduce demand or disrupt manufacturing, supply chains, and delivery timelines. The company also noted potential future goodwill impairment if pandemic conditions worsen.
- Tax matters: The company had approximately $10.3 million of federal NOL carryforwards and a net deferred tax asset of approximately $2.0 million after a $537,000 valuation allowance. Federal tax expense was non-cash because of NOL utilization.
- Subsequent event: After quarter-end, the company repurchased 12,000 shares at $15.50 per share in a private transaction.
Most Important Facts to Verify
- Whether remediation of the identified material weaknesses is effective and whether future filings require additional restatements.
- Whether gross margins recover as supply-chain costs stabilize and online sales increase.
- The company’s dependence on GNC, including the effect of any changes in GNC purchasing, store footprint, or payment practices.
- Whether operating cash flow remains sufficient to fund inventory, working capital, and other obligations after the line of credit’s December 23, 2022 maturity date.
- The realization of the deferred tax asset and availability of federal NOL carryforwards under applicable tax limitations.
- The effect of inflation, supply-chain disruptions, COVID-19 developments, product returns, and inventory obsolescence on future results.
- The status and financial impact of the restatement-related costs, M&A activities, and any subsequent share repurchases.