FitLife Brands, Inc. — FY2013 Form 10-K Summary
Business Context and Reporting Period
FitLife Brands, formerly Bond Laboratories, develops and distributes nutritional supplements for athletic performance, weight loss and general health under NDS, PMD, SirenLabs, CoreActive and related brands. Products are sold primarily through GNC franchise locations in the United States and internationally, with additional online, gym and independent-retailer sales.
The filing covers the fiscal year ended December 31, 2013, with comparative results for 2012. The source provides annual results rather than standalone fourth-quarter results. The company had approximately 15 full-time and one part-time employee at year-end.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $19.684 million | $18.093 million | +8.8% |
| Gross profit | $7.135 million | $6.525 million | +9.4% |
| Gross margin | 36.2% | 36.1% | Broadly stable |
| Operating income | $1.388 million | $1.881 million | -26.3% |
| Operating margin | 7.1% | 10.4% | Down |
| Net income | $1.292 million | $2.524 million | -48.8% |
| Basic diluted EPS | $0.17 / $0.14 | $0.03 / $0.03 | Not directly comparable due to recapitalization and reverse split |
| Cash flow from operations | $2.565 million | $0.582 million | Significant increase |
Cost of goods sold was $12.549 million, compared with $11.568 million in 2012. General and administrative expense increased to $3.100 million from $2.190 million, partly because of $354,039 of stock issued for services and other growth-related costs. Selling and marketing expense increased to approximately $2.415 million from $2.209 million. The filing elsewhere describes this expense as $2.425 million; the financial statements report $2.415 million, which should be reconciled.
Cash and cash equivalents were $3.305 million at December 31, 2013, compared with $936,911 at December 31, 2012. Accounts receivable increased to $1.260 million, while inventory declined to $2.753 million from $3.685 million. Total assets were $9.230 million and stockholders’ equity was $4.809 million.
Total liabilities were $4.422 million, including $437,089 drawn on a $3.0 million revolving line of credit and $2.436 million of term-loan principal outstanding. The term loan was issued in September 2013, bears fixed interest at 3.6%, is secured by substantially all company assets, and matures August 15, 2018. The revolving line was scheduled to mature May 15, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue grew 8.8%, driven by established distribution channels and the launch of the SirenLabs brand.
- Gross profit increased while gross margin remained approximately flat.
- Profitability declined because operating expenses grew faster than revenue, including higher personnel, insurance, sampling, international-expansion, legal and professional costs.
- 2012 net income benefited from a $657,000 non-cash tax benefit. Excluding that benefit, 2013 net income declined by approximately $575,000, or approximately 30.8%, from the comparable 2012 amount cited by management.
- Operating cash flow improved substantially, aided by a $932,355 reduction in inventory and other working-capital changes.
- The company completed a major recapitalization: it redeemed all Series B preferred stock, redeemed half of the Series C preferred stock, converted the remaining Series C preferred stock into common shares, cancelled certain warrants, and completed a one-for-ten reverse stock split.
- The company changed its name to FitLife Brands, Inc. and began trading under the symbol FTLF in October 2013.
Guidance, Outlook, Risks and Unusual Items
Management expected cash from operations, existing cash and other resources to fund liquidity through at least December 31, 2014, while stating that future liquidity depends on continued positive operating cash flow. Management identified additional GNC domestic and international locations, broader CoreActive distribution and international expansion as growth opportunities.
Management expected to launch the Zyri Labs brand in a pilot program at selected corporate-owned stores during the fourth quarter of 2014. The pilot was not expected to materially affect 2014 results but could provide a growth platform for 2015 and beyond.
- Customer concentration is substantial: GNC franchisees accounted for approximately 86% of 2013 sales, or $16.953 million; direct sales to GNC for distribution accounted for an additional 11% of revenue.
- The company relies on third-party manufacturers and suppliers and does not independently verify all product composition, creating supply, quality, recall and product-liability risks.
- The business is subject to extensive FDA, FTC and other regulatory requirements involving ingredients, labeling, advertising, manufacturing and distribution. The company stated that current products contain no DMAA after voluntary reformulation.
- Competition includes larger companies with greater financial, marketing and research resources.
- Patent-related claims filed by Thermolife and Tawnsaura were settled in January and March 2014, respectively, for fees management considered immaterial; the Tawnsaura settlement also secured a Citrulline license.
- The CycloBolan litigation was settled in August 2013, with the $36,000 payment made by the company’s insurer at no cost to the company.
- The company recorded a $50,000 write-down of a strategic investment and issued 311,621 common shares for services at an expense of $354,039.
- Management concluded that disclosure controls and internal control over financial reporting were effective. The auditor did not provide an internal-control attestation because the company qualified as a smaller reporting company.
- The company has federal net operating loss carryforwards of approximately $21.25 million, but utilization may be limited by Internal Revenue Code Section 382 and other factors.
Most Important Facts for Investors to Verify
- Reconcile the reported selling and marketing expense discrepancy of $2.415 million in the financial statements versus $2.425 million in MD&A.
- Review the maturity, renewal or refinancing status of the $437,089 revolving line of credit scheduled to mature in May 2014.
- Assess debt-service capacity and collateral exposure under the secured $2.6 million term loan.
- Evaluate dependence on GNC, which represented approximately 97% of sales when franchisee and direct GNC distribution channels are considered together.
- Review the economic effect and dilution from the reverse split, Series C conversion, service-related share issuances, options and warrants.
- Confirm the final costs and accounting treatment of the patent settlements and any remaining preferred-stock redemption payable.
- Assess whether revenue growth can offset higher operating expenses and sustain profitability after the one-time 2012 tax benefit.
- Review regulatory compliance, product quality controls, insurance coverage and potential liability from nutritional-supplement claims.