FitLife Brands, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. develops and sells nutritional supplements under the NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Metis Nutrition, iSatori, BioGenetic Laboratories, and Energize brands. Products are distributed primarily through GNC and more than 25,000 specialty, mass-market, and online retail locations. The company trades under “FTLF” on the OTC Pink market.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. As of November 11, 2020, 1,060,644 common shares were outstanding.
Financial Highlights
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $6.923 million | $5.316 million | $15.814 million | $15.812 million |
| Gross profit | $2.862 million | $2.253 million | $6.918 million | $6.649 million |
| Gross margin | 41.3% | 42.4% | 43.7% | 42.1% |
| Operating income | $1.660 million | $0.876 million | $2.854 million | $2.508 million |
| Net income | $1.645 million | $0.891 million | $2.981 million | $2.625 million |
| Diluted EPS | $1.45 | $0.72 | $2.63 | $2.08 |
For the nine months ended September 30, 2020, net cash provided by operating activities was $3.475 million, compared with $1.724 million in the prior-year period. There was no investing cash flow. Financing activities provided $0.350 million, principally reflecting $0.450 million of PPP proceeds and $0.071 million from stock-option exercises, partially offset by $0.171 million of share repurchases.
Cash increased to $4.090 million at September 30, 2020 from $0.265 million at December 31, 2019. Total current assets were $9.036 million and total current liabilities were $2.670 million, producing reported working capital of approximately $6.366 million. Accounts receivable were $2.594 million and inventories were $2.255 million.
Total liabilities were $3.293 million, including a $0.452 million PPP loan and $0.220 million of operating lease liabilities. The company had no amounts outstanding under its $2.5 million secured revolving line of credit at September 30, 2020. Total stockholders’ equity was $6.292 million.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 30% to $6.923 million, driven by GNC restocking after its bankruptcy filing and continued online sales growth. Nine-month revenue was essentially unchanged.
- Nine-month online sales increased to 20% of revenue from 11%; Q3 online sales increased to 17% from 12%.
- Nine-month gross margin improved to 43.7% from 42.1%, primarily because of a greater mix of higher-margin direct-to-consumer sales. Q3 gross margin declined to 41.3% from 42.4%.
- Q3 operating income increased 89% and net income increased 85%. Nine-month operating income increased 14% and net income increased 14%.
- Nine-month general and administrative expense included an approximately $354,000 bad-debt write-off related to GNC receivables. Excluding this item, management stated that expense declined due to cost controls.
- GNC remained the largest customer, representing 76% of Q3 revenue and 70% of nine-month revenue, compared with 75% and 77%, respectively, in the prior-year periods.
- The company repurchased 11,900 shares for $171,000 during the first nine months; no shares were repurchased during Q3. Approximately $1.111 million remained available under the repurchase program.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash from operations, existing cash, and available borrowings under the revolving credit facility are expected to fund liquidity needs for the next twelve months, although no assurance was provided.
- COVID-19 temporarily disrupted retail partners, suppliers, and operations. Online sales and improved recent-quarter sales offset much of the initial impact. A resurgence could reduce demand and disrupt supply chains or manufacturing lead times.
- The company received a $449,700 PPP loan at 1.0% interest, maturing April 27, 2022. It intends to seek full forgiveness, but stated that forgiveness is not guaranteed. The company also deferred $55,000 of employer payroll taxes through September 30, 2020.
- GNC filed for Chapter 11 bankruptcy on June 23, 2020. The company subsequently received $829,000 in full settlement of its priority administrative claim. Approximately $354,000 relating to older GNC receivables was fully reserved, although a partial recovery remains possible.
- The company extended its revolving credit facility maturity date to September 23, 2021 and added a 75-basis-point LIBOR floor. The facility is secured by company assets.
- Goodwill was $225,000 at September 30, 2020. Management identified no goodwill impairment triggering event during Q3, but warned that worsening COVID-19 conditions could lead to future impairment.
- The company reported no material litigation, no defaults upon senior securities, and effective disclosure controls and internal control over financial reporting as of September 30, 2020.
Most Important Facts for Investors to Verify
- Whether GNC’s restructuring and customer concentration could affect future revenue, receivable collections, or product distribution.
- The final amount of PPP loan forgiveness and any remaining repayment obligation.
- Whether the higher online-sales mix and improved nine-month gross margin are sustainable after pandemic-related effects normalize.
- Future COVID-19 effects on demand, retail locations, suppliers, and manufacturing capacity.
- Cash conversion, accounts-receivable quality, and the continued availability and terms of the secured revolving credit facility.
- Potential dilution from 95,785 outstanding stock options and warrants to purchase 35,870 shares.