FitLife Brands, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
FitLife Brands, Inc. is a Nevada-based provider of nutritional supplements marketed under NDS Nutrition, PMD Sports, SirenLabs, CoreActive, Metis Nutrition, iSatori, BioGenetic Laboratories, and Energize. NDS products are distributed primarily through GNC, while iSatori products are sold through more than 25,000 specialty, mass-market, and online locations. The filing covers the fiscal year ended December 31, 2019, with comparison to fiscal 2018. The company operates as one reportable segment and trades on the OTC Pink market under “FTLF.”
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $19.497 million | $17.077 million | +14% |
| Gross profit | $8.061 million | $6.745 million | +20% |
| Gross margin | 41.3% | 39.5% | +180 basis points |
| Operating income | $2.581 million | $653,000 | +295% |
| Net income | $2.698 million | $509,000 | +430% |
| Net income available to common shareholders | $2.635 million | $404,000 | +542% |
| Basic diluted earnings per share | $2.57 / $2.41 | $0.37 / $0.37 | Improved |
| Adjusted EBITDA | $2.986 million | $1.015 million | +194% |
| Cash flow from operations | $2.261 million | $258,000 | +776% |
- Cost of goods sold increased 11% to $11.436 million, below the rate of revenue growth.
- General and administrative expense decreased 9% to $3.049 million, and selling and marketing expense decreased 12% to $2.379 million.
- Operating margin increased to approximately 13.2% from 3.8%; net margin increased to approximately 13.8% from 3.0%.
- Other income in 2019 included a $171,000 gain on settlement. Interest expense declined to $47,000 from $133,000.
- Cash was $265,000 at year-end, accounts receivable were $2.366 million, and working capital was $2.925 million versus $1.890 million in 2018.
- Inventories declined to $2.998 million from $3.523 million. The allowance for inventory obsolescence increased to $130,000 from $107,000.
- Total assets were $6.326 million and stockholders’ equity was $3.342 million at December 31, 2019.
Debt, Liquidity, and Capital Allocation
- The company repaid related-party notes with aggregate principal and accrued interest of $615,000 on September 24, 2019. No related-party notes remained outstanding at year-end.
- In September 2019, the company entered into a secured $2.5 million revolving credit facility with Mutual of Omaha Bank. Borrowings bear interest at one-month LIBOR plus 2.75% and mature September 23, 2020, unless renewed.
- The credit facility had a zero balance at December 31, 2019. On March 20, 2020, the company borrowed the full $2.5 million in anticipation of COVID-19-related sales pressure.
- Management stated that operating cash flow, cash resources, and available borrowings were expected to fund liquidity needs for the following twelve months, but acknowledged that no assurance could be given.
- Cash used in financing activities was $2.255 million, primarily reflecting repayment of notes and common-stock repurchases. The company repurchased 99,493 common shares for approximately $1.051 million, excluding shares repurchased in connection with the reverse/forward split.
- The company had no shares of Series A Preferred Stock outstanding at year-end after repurchasing 50 shares and converting the remaining 550 shares into 123,222 common shares. It has no continuing preferred dividend obligation.
Material Changes Versus 2018
- Revenue growth reflected improvement in the wholesale business and increased direct-to-consumer activity. Online revenue rose to approximately 12% of total revenue from approximately 5%.
- Profitability improved substantially because of higher revenue, increased higher-margin online sales, lower operating expenses, reduced interest expense, and the settlement gain.
- Operating cash generation increased to $2.261 million from $258,000, although accounts receivable increased by $487,000 and accounts payable decreased by $618,000.
- GNC remained the dominant customer, accounting for $14.795 million, or 75%, of 2019 revenue versus 77% in 2018. GNC represented approximately 87% of gross accounts receivable at year-end versus 82% in 2018.
- The company completed a 1-for-8,000 reverse split followed by an 800-for-1 forward split in April 2019, effectively a 1-for-10 adjustment for financial statement presentation and reducing authorized common shares from 150 million to 15 million.
- The company adopted lease accounting guidance in 2019, recognizing a $254,000 right-of-use asset and $254,000 of lease liabilities at year-end.
- Weaver and Tidwell replaced Weinberg as independent registered public accounting firm in September 2019. The filing reports no disagreements or reportable events with the former auditor.
Guidance, Outlook, Risks, and Unusual Items
- Management expected e-commerce revenue to continue increasing relative to prior periods because of its higher margins and planned investment in digital capabilities.
- Management anticipated that COVID-19 would materially reduce sales through GNC, other wholesale partners, and traditional retail channels beginning in the quarter ended March 31, 2020 and at least through the quarter ended June 30, 2020. The company could not quantify the magnitude or duration of the impact.
- Management expected e-commerce growth to partially offset, but not necessarily eliminate, near-term traditional-channel weakness.
- GNC’s disclosed liquidity concerns and substantial doubt about its ability to continue as a going concern created significant customer concentration and accounts-receivable collection risk.
- Other key risks include intense competition, product returns, regulatory and product-claim compliance, product liability, reliance on contract manufacturers and suppliers, adverse publicity, changing consumer demand, limited trading liquidity, and dependence on key personnel.
- The company had approximately $26.6 million of federal net operating loss carryforwards, but recorded a full valuation allowance because realization was not considered more likely than not. Use of the carryforwards may also be limited under Internal Revenue Code Section 382.
- No material litigation was reported. The company reported no off-balance-sheet financing arrangements or material contingent interests in unconsolidated entities.
- There were no goodwill or other long-lived asset impairment charges in 2019.
Most Important Facts for Investors to Verify
- Confirm the post-year-end $2.5 million borrowing, its maturity, collateral package, covenants, and repayment capacity.
- Monitor GNC’s financial condition, purchasing activity, store footprint, and payment performance because GNC accounted for 75% of revenue and approximately 87% of gross receivables.
- Assess whether 2019 profitability and cash generation are sustainable after excluding the $171,000 settlement gain and considering COVID-19 effects.
- Review the company’s cash balance, working-capital trends, inventory reserves, product-return accruals, and receivables collectability.
- Evaluate the company’s ability to expand higher-margin e-commerce sales while replacing or diversifying traditional wholesale revenue.
- Consider dilution and capital-allocation effects from outstanding options and warrants, stock-based compensation, share repurchases, and the former preferred-stock conversion.
- Verify the effect of the reverse/forward split on historical share counts, ownership percentages, trading prices, and per-share data.