FitLife Brands, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. is a nutritional-supplement company marketing NDS and iSatori products through GNC, specialty, mass-market, and online channels. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company trades on the OTC Pink market under FTLF.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $6.151 million | $5.878 million | Up 5% |
| Gross profit | $2.737 million | $2.541 million | Up 8% |
| Gross margin | Approximately 44.5% | Approximately 43.2% | Improved |
| Operating income | $1.321 million | $1.202 million | Up 10% |
| Net income | $1.428 million | $1.187 million | Up 20% |
| Basic EPS | $1.36 | $1.07 | Up |
| Diluted EPS | $1.27 | $0.94 | Up |
| Net cash from operating activities | $1,000 | $(121,000) | Improved |
- Online sales represented approximately 14% of revenue, compared with 10% in the prior-year quarter.
- GNC sales were $4.697 million, or 76% of revenue, compared with $4.864 million, or 82%, in Q1 2019. GNC represented 91% of accounts receivable at March 31, 2020.
- Cash was $2.666 million at March 31, 2020, compared with $265,000 at December 31, 2019. Accounts receivable were $4.692 million and inventories were $3.023 million.
- Working capital was approximately $4.296 million at March 31, 2020, compared with $2.925 million at December 31, 2019.
- Total liabilities were $6.306 million and stockholders’ equity was $4.698 million at March 31, 2020.
- The company drew $2.5 million under a secured revolving line of credit on March 20, 2020. The borrowing was repaid on April 29, 2020, after the reporting date. The facility bears interest at one-month LIBOR plus 2.75% and had a September 23, 2020 maturity date unless renewed.
- Cash provided by financing activities was $2.400 million, including the line-of-credit advance, $71,000 from option exercises, and a $171,000 common-stock repurchase.
- The company had approximately $26.6 million of federal net operating-loss carryforwards as of December 31, 2019. Management recorded no federal income-tax expense based on expected NOL utilization; a $41,000 tax benefit/refund was reported in the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased $273,000, primarily reflecting improvement in wholesale sales and growth in online direct-to-consumer sales.
- Gross profit increased $196,000, with management attributing the margin improvement to product mix and higher online sales.
- General and administrative expense declined $41,000 to $733,000 following expense-reduction initiatives implemented in 2019.
- Selling and marketing expense increased $121,000 to $671,000 as the company invested in marketing intended to drive incremental revenue.
- Interest expense declined to $4,000 from $15,000, and the company recorded a $70,000 gain on settlement in Q1 2020.
- Basic weighted-average shares declined to 1.052 million from 1.112 million, partly reflecting share repurchases, while diluted weighted-average shares declined to 1.126 million from 1.269 million.
- The company repurchased 11,900 shares for $171,000 during the quarter. Approximately $1.111 million remained available under the repurchase program at March 31, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that COVID-19 did not materially adversely affect first-quarter results, but expects shelter-in-place restrictions and pressure on retail and wholesale partners to have a material adverse effect beginning in the quarter ending June 30, 2020.
- The filing states that the duration and financial impact of COVID-19 cannot be determined. Risks include weaker GNC and wholesale sales, customer liquidity constraints, store-count reductions, supplier disruption, and collection timing for accounts receivable.
- Management expected operating cash flow, existing cash, and available borrowings to support liquidity for the next twelve months, but cautioned that this is not assured and that failure to generate positive operating cash flow or maintain borrowing availability could materially harm the business.
- COVID-19 could result in future goodwill impairment charges, although no triggering event was identified for the quarter ended March 31, 2020.
- As a subsequent event, the company received approximately $449,700 under the Small Business Administration Paycheck Protection Program on April 27, 2020. The loan bears 1.00% interest and is scheduled to mature April 27, 2022, subject to the program’s terms.
- The company reported no material pending litigation, no defaults upon senior securities, and no material changes in internal controls. Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2020.
Important Facts for Investors to Verify
- Confirm the repayment and any remaining obligations under the $2.5 million revolving credit facility, including security interests, maturity, and covenant compliance.
- Assess the effect of COVID-19 on GNC, other wholesale customers, online sales, receivables collections, and subsequent-quarter revenue and margins.
- Monitor customer concentration: GNC accounted for 76% of Q1 revenue and 91% of accounts receivable.
- Verify the terms, forgiveness status, and accounting treatment of the approximately $449,700 PPP loan.
- Evaluate whether future COVID-19 effects could trigger goodwill impairment or changes in inventory, receivable, and product-return reserves.
- Review the company’s ability to sustain positive operating cash flow, particularly because Q1 operating cash flow was only $1,000 despite $1.428 million of net income.
- Consider dilution from 95,785 outstanding options and 35,870 outstanding warrants as of March 31, 2020.