FitLife Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. markets proprietary 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 17,000 specialty, mass-market, and online locations. The unaudited filing covers the three and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods.
On April 7, 2021, the Company acquired substantially all assets of Nutrology, a provider of natural and plant-based supplements, for total consideration of $529,000, including working-capital adjustments.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $8.141 million | $2.740 million | $14.299 million | $8.891 million |
| Gross profit | $3.561 million | $1.319 million | $6.638 million | $4.056 million |
| Gross margin | 43.7% | 48.1% | 46.4% | 45.6% |
| Operating income (loss) | $1.913 million | $(0.127) million | $3.456 million | $1.193 million |
| Net income (loss) | $1.508 million | $(0.092) million | $3.192 million | $1.336 million |
| Diluted EPS | $1.26 | $(0.09) | $2.68 | $1.19 |
| Adjusted EBITDA | $2.035 million | $(0.091) million | $3.717 million | $1.270 million |
Six-month operating cash flow was $3.008 million, compared with $1.603 million in the prior-year period. Investing cash flow was $(0.529) million, primarily reflecting the Nutrology acquisition. Financing cash flow was $(0.390) million, principally due to common-stock and option repurchases. Cash increased from $6.336 million at December 31, 2020 to $8.425 million at June 30, 2021.
At June 30, 2021, working capital was approximately $10.728 million, including $8.425 million of cash, $1.757 million of accounts receivable, and $4.834 million of inventory. Total assets were $19.761 million and stockholders’ equity was $15.074 million. The Company had no outstanding balance under its $2.5 million revolving line of credit and no remaining PPP loan liability; the PPP loan was forgiven in January 2021. Lease liabilities totaled $184,000.
GNC accounted for 73% of second-quarter revenue and 70% of six-month revenue, compared with 44% and 67%, respectively, in the prior-year periods. Online sales represented 21% of second-quarter revenue and 23% of six-month revenue.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 197% to $8.141 million; six-month revenue increased 61% to $14.299 million.
- Second-quarter gross profit increased 170%, while the gross margin declined to 43.7% from 48.1%, primarily because online sales represented a smaller proportion of revenue.
- Six-month gross margin improved to 46.4% from 45.6%, primarily due to a greater proportion of higher-margin online sales.
- The Company moved from a second-quarter operating loss of $127,000 to operating income of $1.913 million and from a net loss of $92,000 to net income of $1.508 million.
- Six-month net income increased 139% to $3.192 million. The improvement reflected higher wholesale and online sales compared with the COVID-19-affected 2020 period.
- Selling and marketing expense increased 65% in the second quarter and 25% for the six-month period, reflecting higher cooperative marketing expense funded by wholesale price increases. Management expects this higher expense level to continue for the foreseeable future.
- Inventory increased to $4.834 million from $3.401 million at year-end 2020, while accounts receivable declined to $1.757 million from $2.044 million.
- The Company repurchased 9,023 common shares for approximately $260,000 during the quarter and retired 12,710 employee options for approximately $186,000. Approximately $3.170 million remained available under the $5.0 million repurchase authorization at June 30, 2021.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The Company did not provide formal revenue or earnings guidance. Management stated that existing cash, operating cash flow, and available borrowings are expected to provide sufficient liquidity for the next twelve months, while noting that no assurance can be given. Management currently does not intend to raise additional equity or debt capital.
- COVID-19 remains a material uncertainty. Renewed stay-at-home orders, supply-chain disruptions, manufacturing delays, or reduced retail demand could adversely affect results and could lead to goodwill impairment.
- The Company is highly dependent on GNC, which represented 70% of six-month revenue and 77% of accounts receivable at June 30, 2021.
- The Company’s revolving credit facility is secured by all assets and bears interest at one-month LIBOR plus 2.75%. On August 4, 2021, after quarter-end, its maturity date was extended to September 23, 2022.
- Federal net operating loss carryforwards were approximately $18.4 million, supported by a deferred tax asset of approximately $3.6 million and a $537,000 valuation allowance. The Tax Benefits Preservation Plan is intended to protect these tax attributes by discouraging ownership changes involving holders of 4.99% or more of the Company’s securities.
- The Nutrology acquisition contributed $189,000 of revenue and $85,000 of gross profit from April 7 through June 30, 2021. Preliminary purchase accounting included $133,000 of goodwill and $222,000 of identifiable intangible assets. Approximately $49,000 of transaction costs were incurred, with $30,000 expensed in the second quarter and $19,000 expected to be expensed in the third quarter.
- Six-month results included a $453,000 gain from PPP loan forgiveness. The prior-year period included a $70,000 gain on settlement. These unusual items affect comparability.
- No material litigation was reported. Management concluded that disclosure controls and internal control over financial reporting were effective as of June 30, 2021.
Important Facts for Investors to Verify
- Whether revenue growth and margins remain durable after the favorable comparison with the COVID-19-affected 2020 period.
- GNC’s continuing financial and commercial importance, including concentration of revenue and receivables.
- Inventory growth, product demand, return rates, and potential obsolescence or working-capital requirements.
- The sustainability of higher cooperative marketing expenses and the extent to which wholesale price increases offset them.
- The preliminary valuation and future performance of Nutrology, including goodwill and acquired intangible assets subject to impairment risk.
- The availability and terms of the extended revolving credit facility and the Company’s ability to continue generating positive operating cash flow.
- The realizability of the deferred tax asset and the Company’s ability to use its NOL carryforwards without an ownership change.