FitLife Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. markets nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis Nutrition, iSatori, BioGenetic Laboratories and Energize. NDS products are distributed principally through GNC, while iSatori products are sold through more than 25,000 specialty, mass-market and online locations. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, filed November 14, 2017.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 |
|---|---|---|---|---|
| Revenue | $4.026 million | $5.341 million | $14.637 million | $21.616 million |
| Gross profit | $1.475 million | $1.987 million | $4.919 million | $9.147 million |
| Gross margin | 36.6% | 37.2% | 33.6% | 42.3% |
| Operating income (loss) | $(0.483) million | $(0.358) million | $(1.307) million | $1.778 million |
| Net income (loss) | $(0.511) million | $(0.361) million | $(1.396) million | $1.532 million |
| Basic earnings (loss) per share | $(0.05) | $(0.03) | $(0.13) | $0.15 |
For the nine months, operating expenses were $6.225 million, including $3.200 million of general and administrative expense, $2.690 million of selling and marketing expense, and $0.336 million of depreciation and amortization. Interest expense was $83,920 for the nine months.
Operating cash flow was $247,818 for the nine months ended September 30, 2017, compared with $357,665 in the prior-year period. Investing activities used $20,305, primarily for property and equipment. Financing activities used $415,682, principally for debt repayments. Cash declined to $1.105 million from $1.293 million at December 31, 2016.
At September 30, 2017, current assets were $7.734 million and current liabilities were $5.528 million, producing reported working capital of approximately $2.206 million. Accounts receivable were $3.381 million and inventory was $2.869 million. Total assets were $14.781 million and stockholders’ equity was $9.253 million.
Debt consisted primarily of a $1.950 million revolving line of credit, a $506,889 current portion of a term loan, and $4,131 of equipment-related notes. Approximately $2.4 million was owed to U.S. Bank under the revolving line and term loan at September 30, 2017. The company had no long-term debt classified beyond the current portion at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 24.6% in the quarter and 32.3% year to date.
- NDS revenue decreased to $3.215 million in the quarter and $10.938 million year to date, primarily due to the absence of 2016 convention revenue and reduced wholesale purchases by the largest distribution partner as it reduced inventory.
- iSatori revenue decreased to $810,208 in the quarter and $3.699 million year to date, principally due to fewer new product introductions and restructuring at its largest third-party distributor.
- The nine-month results included a $700,000 non-recurring margin support credit memorandum with GNC. Management also cited lower sales, approximately $376,000 of inventory write-offs, and the decision not to attend the 2017 annual franchise convention as factors affecting results.
- Gross margin declined materially year to date, partly because of the inventory write-offs, including approximately $276,000 related to products containing picamilion.
- General and administrative expense declined 17.0% year to date, while selling and marketing expense declined 14.3%, reflecting cost-reduction initiatives, budgetary controls and iSatori integration efficiencies.
- The company issued 182,064 common shares valued at $82,001 for employee and director services during the nine-month period.
Guidance, Outlook, Risks and Unusual Items
Management stated that iSatori distributor restructuring and the reduced product-introduction cadence were expected to stabilize in subsequent quarters, with new product introductions remaining a strategic growth element. No quantified revenue, earnings or other formal financial guidance was provided.
The most significant liquidity risk is the U.S. Bank financing. The company violated minimum-EBITDA-related covenants for periods ended August 31 and September 30, 2017 and received a notice of default on October 27, 2017. U.S. Bank had not exercised its remedies at the filing date but reserved the right to accelerate the approximately $2.4 million outstanding. The revolving line matured December 15, 2017, and management did not anticipate an extension or renewal while negotiating with alternative lenders. Failure to refinance or repay the debt could materially and negatively affect financial condition.
Goodwill and indefinite-lived intangible assets totaled $6.212 million at September 30, 2017. Management did not consider the interim results a triggering event for an impairment test, but the December 31, 2017 annual test could result in an impairment charge depending on the 2018 forecast and market conditions.
GNC represented approximately 81.0% of gross sales before discounts and coupons for the nine months ended September 30, 2017, and 77.7% of accounts receivable at September 30, 2017, creating substantial customer concentration risk.
An action concerning claims about Testofen marketing remained active. A separate HCG Activator lawsuit was dismissed on June 27, 2017 without a material impact. Management stated that no other pending or threatened proceedings were expected to have a material adverse effect.
The company stated that disclosure controls and internal control over financial reporting were effective at the reasonable assurance level as of September 30, 2017. The interim financial statements are unaudited and do not include all information required for complete GAAP financial statements.
Important Facts for Investors to Verify
- Whether the company successfully refinanced or repaid the approximately $2.4 million U.S. Bank obligations before or after the December 15, 2017 maturity date, and whether any debt was accelerated.
- The final outcome of the December 31, 2017 goodwill and indefinite-lived intangible asset impairment test.
- Whether revenue stabilizes following reduced GNC inventory purchases, the $700,000 margin support credit, and the 2017 convention decision.
- The magnitude and recurrence of inventory write-offs and the effect on gross margins.
- Progress in iSatori distribution, product introductions and integration efforts.
- Ongoing exposure to GNC concentration and the status and potential financial impact of the Testofen litigation.