FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2023; filed May 15, 2023. Amounts are in thousands, except per-share data. FitLife Brands markets nutritional supplements and wellness products under NDS, iSatori, and MRC brands through GNC, retail, online, and primarily Amazon channels.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $10,738 | $7,294 | +47% |
| Gross profit | $4,408 | $3,111 | +42% |
| Gross margin | 41.1% | 42.7% | Down 160 bps |
| Operating income | $673 | $1,596 | -58% |
| Net income | $156 | $1,290 | -88% |
| Basic diluted EPS | $0.03 | $0.28 | Down |
| Net cash from operations | $232 | $1,134 | -79% |
| Adjusted EBITDA | $2,246 | $1,723 | +30% |
Net margin was approximately 1.5%, compared with 17.7% in the prior-year quarter. Management reported legacy FitLife revenue of approximately $8.1 million, up 11.1%, with wholesale revenue up 6.0% and online revenue up 25.6%. Online revenue represented approximately 47% of total revenue versus 27% in Q1 2022.
At March 31, 2023, cash and cash equivalents were $7,977, restricted cash was $950, and working capital was approximately $11,261. Accounts receivable were $2,045 and inventories were $8,791. Total assets were $41,665, compared with $25,707 at December 31, 2022.
Total debt was $12,500, consisting of a term loan; no revolving credit facility borrowings were outstanding. Total liabilities were $20,057 and stockholders’ equity was $21,608. Cash and restricted cash declined to $8,927 at quarter-end from $13,277 at year-end 2022.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the February 28, 2023 acquisition of Mimi’s Rock Corp. (“MRC”), which contributed $2,639 of revenue after closing, and growth in legacy FitLife sales.
- Cost of goods sold increased 51%, exceeding revenue growth, due to MRC sales, inflationary product costs, and higher online distribution costs.
- Gross margin declined principally because of a $110 inventory fair-value step-up amortization related to MRC; excluding that item, reported gross margin would have been approximately 42.1%.
- Operating expenses increased 147%, including $1,372 of merger and acquisition-related expense versus $6 in Q1 2022 and higher SG&A following the MRC acquisition.
- Net income decreased primarily because of acquisition-related transaction costs, the inventory step-up amortization, and a disclosed $112 loss on a foreign-currency forward contract.
- Operating cash flow fell to $232, while $17,099 was used to acquire MRC and $12,500 was provided by the new term loan.
Acquisition, debt, outlook, and risks
MRC was acquired for $17,099, funded with cash on hand and proceeds from a new First Citizens Bank term loan. The purchase-price allocation remains provisional, including $7,769 of intangible assets and $10,787 of goodwill recorded on the March 31 balance sheet. MRC contributed $2,639 of revenue and a $747 net loss from February 28 through March 31, 2023.
The term loan bears interest at one-month Term SOFR plus 2.75%, with quarterly principal and interest payments beginning June 10, 2023 and scheduled amortization through February 2028. The company was in compliance with its covenants at March 31, 2023. The revolving credit facility provides $3.5 million of capacity and had no outstanding balance.
Management expects operating cash flow, existing cash, and available revolver capacity to fund liquidity needs for the next twelve months, but acknowledges that this is not assured. The company is dependent on positive operating cash flow and available credit; failure to generate sufficient cash or access additional capital could materially harm the business.
Management expects online revenue to continue increasing relative to prior periods and believes e-commerce investment may provide near- and longer-term benefits. Inflation remains a risk because the company may not be able to fully pass higher procurement costs to customers. Other risks include customer concentration, foreign-currency exposure, variable-rate debt, goodwill impairment, product returns, and integration of MRC. GNC represented 49% of Q1 2023 revenue, down from 70% in Q1 2022.
The company extended its share repurchase authorization by up to $5,000 over 24 months but repurchased no shares during the quarter. No material litigation was reported.
Controls and unusual items
Management concluded that disclosure controls and internal control over financial reporting were not effective because of material weaknesses involving the control environment, risk oversight, control activities, information processing and communication, and monitoring. These weaknesses previously resulted in restatements of certain 2019–2021 financial statements. Remediation continued during 2023, including use of accounting consultants, hiring a new CFO in August 2022, and development of COSO-based control checklists.
The company adopted the CECL credit-loss standard on January 1, 2023; management reported no significant financial-statement impact. The filing states that no goodwill impairment indicators existed at March 31, 2023.
Important facts for investors to verify
- Whether MRC’s provisional intangible-asset and goodwill valuations will change during the measurement period.
- The recurring earnings impact of the new term loan, variable SOFR interest rates, and quarterly principal payments.
- Whether online growth and MRC integration can offset lower gross margin and higher operating expenses.
- Compliance with the 1.25x fixed-charge coverage covenant and future leverage requirements.
- Progress in remediating material weaknesses in internal controls and whether further restatements or reporting errors arise.
- The company’s ability to sustain positive operating cash flow while funding inventory, debt service, and acquisition-related obligations.
- Exposure to GNC concentration, inflation, foreign exchange, product returns, and potential goodwill impairment.