FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed August 13, 2020. FitLife develops and sells nutritional supplements under NDS, iSatori and related brands through GNC, specialty, mass-market and online channels. The company trades on the OTC Pink market under FTLF.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Year-over-Year Change | Six Months Ended June 30, 2020 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $2.740 million | Down 41% | $8.891 million | Down 15% |
| Gross profit | $1.319 million | Down 29% | $4.056 million | Down 8% |
| Gross margin | 48.1% | Up from 40.1% | 45.6% | Up from 41.9% |
| Operating income (loss) | $(127,000) | From $429,000 income | $1.193 million | Down 27% |
| Net income (loss) | $(92,000) | From $547,000 income | $1.336 million | Down 23% |
| Basic EPS | $(0.09) | From $0.51 | $1.27 | From $1.59 |
| Cash flow from operations | Not separately provided | — | $1.603 million | Up from $988,000 |
Balance Sheet, Debt and Liquidity
- Cash was $2.218 million at June 30, 2020, compared with $265,000 at December 31, 2019. Working capital increased to approximately $4.694 million from $2.925 million.
- Accounts receivable were $1.362 million, net of a $387,000 allowance; inventories were $3.467 million.
- Total liabilities were $3.085 million and stockholders’ equity was $4.628 million at June 30, 2020.
- The company had no outstanding borrowings under its $2.5 million secured revolving line of credit at June 30, 2020. It drew the full facility on March 20, 2020 and repaid it on April 29, 2020.
- The company received a $449,700 PPP loan on April 27, 2020. The loan bears 1.0% interest and matures April 27, 2022, subject to the applicable PPP terms.
- Six-month financing cash flow was $350,000, including $450,000 of PPP proceeds, $71,000 from stock-option exercises and $171,000 of share repurchases.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue declined $1.878 million, primarily because COVID-19 caused retail-partner closures and stay-at-home orders. Six-month revenue declined $1.605 million.
- Online sales increased to 41% of second-quarter revenue and 22% of six-month revenue, compared with 13% and 11%, respectively, in the prior-year periods. This shift supported higher gross margins.
- General and administrative expense increased to $1.001 million in the quarter and $1.734 million for six months, principally due to a $354,000 bad-debt write-off associated with GNC’s bankruptcy.
- GNC filed for Chapter 11 bankruptcy protection on June 23, 2020. GNC represented 44% of second-quarter revenue and 67% of six-month revenue, versus 75% and 79% in the prior-year periods. Gross GNC receivables were $1.305 million, of which approximately $354,000 related to pre-petition deliveries and was written off.
- The company repurchased 11,900 common shares for $171,000 during the first six months; no shares were repurchased during the second quarter. Approximately $1.111 million remained available under the repurchase program at June 30, 2020.
- Accumulated deficit improved to $25.770 million from $27.106 million at year-end 2019, reflecting six-month net income.
Outlook, Risks and Unusual Items
- Management stated that COVID-19 materially and adversely affected operations and that the duration and ultimate impact remain uncertain. Management expected the prior negative sales impact to abate during the quarter ending September 30, 2020, with growth potentially returning thereafter; no assurance was provided.
- Management expected cash from operations, existing cash and available revolver borrowings to fund liquidity for the next twelve months, but acknowledged that additional capital could be required if operating cash flow or credit availability is insufficient.
- On August 4, 2020, after quarter-end, the revolving credit maturity date was extended to September 23, 2021 and a 75-basis-point LIBOR floor was added.
- GNC concentration, customer liquidity and bankruptcy recovery remain significant risks. Management expected most GNC receivables tied to products delivered within 20 days before the bankruptcy filing to qualify for priority administrative claims, but recovery depends on GNC’s bankruptcy process.
- The company reported no material litigation and no defaults on senior securities. It noted that prolonged COVID-19 effects could result in future goodwill impairment, although no triggering event was identified for the quarter.
- The company had approximately $26.6 million of federal net operating loss carryforwards as of December 31, 2019, subject to statutory limitations, and maintained a full valuation allowance against deferred tax assets.
Investor Verification Items
- Verify GNC’s bankruptcy status, emergence timing and the actual recovery of the company’s pre- and post-petition receivables.
- Assess whether the expected September 2020 sales recovery occurred and whether online growth offset continuing wholesale and retail disruption.
- Confirm PPP loan forgiveness eligibility, the amount ultimately repayable and related cash obligations.
- Review ongoing availability, collateral requirements, interest terms and covenant or default provisions of the amended revolving credit facility.
- Monitor customer concentration, gross-margin sustainability, inventory levels and potential goodwill impairment indicators.
- Reconcile the reported cash balance and operating cash flow with subsequent filings, given the temporary revolver draw and PPP financing.