FitLife Brands, Inc. — Fiscal 2017 Form 10-K Summary
Business Context and Reporting Period
FitLife Brands, Inc. develops and markets sports nutrition, weight-loss and general nutritional supplements under the NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories and Energize brands. The company sells through GNC franchise and corporate stores, more than 25,000 specialty, mass-market and online locations, distributors and direct-to-consumer channels. The filing covers the fiscal year ended December 31, 2017, compared with fiscal 2016.
GNC remained the principal distribution channel, accounting for approximately 80% of 2017 revenue and 82% of 2016 revenue. The company had 28 full-time employees at December 31, 2017 and traded on the OTC Pink market under FTLF.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $17.799 million | $25.314 million | Down 29.7% |
| Gross profit | $5.091 million | $10.071 million | Down 49.4% |
| Gross margin | 28.6% | 39.8% | Down 11.2 percentage points |
| Operating income (loss) | $(8.953) million | $0.472 million | Declined $9.425 million |
| Net income (loss) | $(9.762) million | $0.368 million | Declined $10.130 million |
| Net margin | (54.8%) | 1.5% | Material deterioration |
| Basic and diluted EPS | $(0.93) | $0.04 | Declined $0.97 |
| Net cash from operations | $0.666 million | $0.048 million | Increased $0.618 million |
- NDS revenue decreased 25.0% to $13.701 million, principally because GNC reduced inventory levels and purchases.
- iSatori revenue decreased 41.9% to $4.099 million, reflecting fewer new product introductions and restructuring at its largest third-party distributor.
- Cost of goods sold declined 16.6% to $12.708 million, but included the effects of approximately $1.1 million of product-return reserves.
- General and administrative expense declined to $4.180 million from $5.002 million, while selling and marketing expense declined to $3.525 million from $4.118 million.
- The company recorded a $5.929 million impairment charge for iSatori goodwill and other intangible assets after iSatori results fell below expectations.
- The company recorded a $689,000 deferred-tax-asset write-off and ended 2017 with no net deferred tax asset.
- Reported EBITDA was $(8.551) million and adjusted EBITDA was $(2.482) million, compared with $955,704 and $1.054 million, respectively, in 2016. These are non-GAAP measures.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Cash | $1.262 million | $1.293 million |
| Accounts receivable, net | $1.958 million | $2.626 million |
| Inventory, net | $2.874 million | $3.757 million |
| Current assets | $6.320 million | $7.934 million |
| Total assets | $6.862 million | $15.379 million |
| Current liabilities | $5.951 million | $4.477 million |
| Working capital | $0.370 million | $3.457 million |
| Stockholders’ equity | $0.912 million | $10.533 million |
- At year-end, debt classified as current included a $1.950 million revolving line of credit and $414,877 of term-loan principal. Total debt and advances were $2.365 million, all classified as current.
- The company was in violation of a U.S. Bank loan covenant and had received a default notice. On January 22, 2018, it used approximately $2.0 million of receivables sold under a new Compass merchant agreement, plus approximately $360,000 of existing cash, to repay U.S. Bank principal and accrued interest. The U.S. Bank facilities subsequently terminated.
- The Compass arrangement permits sales of qualifying receivables of up to $5.0 million, is guaranteed by FitLife and is secured by substantially all relevant inventory, receivables and related collateral. The filing states that the company depends on operating cash flow and additional receivables eligible for sale to meet working-capital needs.
- Management believed available cash and liquidity would fund operations for the next twelve months, but acknowledged that no assurance could be given if operating cash flow or access to the Compass facility proved insufficient.
- Operating cash flow was positive despite the net loss, aided by non-cash impairment and working-capital changes. Investing cash use was $185,064, and financing cash use was $511,825.
Material Changes Versus the Prior Comparable Period
- Revenue fell sharply because of lower GNC traffic and same-store sales, GNC inventory reductions, a $700,000 one-time GNC margin-support credit, and weaker iSatori distribution performance.
- Gross margin contracted substantially, while the company moved from net income to a significant net loss.
- Accounts-receivable allowances increased to $1.264 million from $166,901, including $1.152 million of product-return reserves and $112,101 for doubtful accounts. Bad-debt expense rose to $169,188 from $3,553, partly due to the Vitamin World bankruptcy and a note-receivable write-off.
- Total assets and stockholders’ equity declined substantially, primarily because of the iSatori impairment and accumulated 2017 loss.
- The company reduced operating and marketing expenses through cost controls. Executive compensation was reduced in October 2017, and independent directors reduced annual compensation by 10%.
- The company introduced 50 products in 2017, including eight new products and 42 reformulations or flavor extensions.
Outlook, Commentary, Risks and Unusual Items
Management stated that GNC and broader retail trends appeared to have stabilized and expected new product introductions, expanded GNC distribution, broader iSatori retail placement and omnichannel direct-to-consumer sales to support future growth. The filing provides no formal numerical revenue, earnings or margin guidance.
- Liquidity risk: Continued losses, insufficient operating cash flow or inability to sell additional receivables under the Compass agreement could require additional capital and materially harm operations.
- Customer concentration: GNC accounted for approximately 80% of revenue and approximately 82% of gross accounts receivable at December 31, 2017. GNC franchisees are not required to purchase FitLife products.
- Product and regulatory risk: The business is subject to FDA, FTC and other domestic and international requirements involving ingredients, labeling, manufacturing, advertising and product claims. Noncompliance, recalls or adverse publicity could reduce sales and create liability.
- Supplier risk: FitLife relies on a limited number of third-party manufacturers and suppliers and does not independently analyze all products.
- Litigation: The Ryan litigation involving Testofen-related claims remained active. A separate HCG Activator lawsuit was dismissed on June 27, 2017 without a material financial impact.
- Management change: John Wilson resigned as CEO and a director on February 18, 2018. Dayton Judd became interim CEO and chairman and received a consulting agreement providing $225,000 in annual cash compensation and 225,000 common shares.
- Capital structure: Approximately 10.682 million common shares were outstanding at December 31, 2017; 870,284 options and 60,620 warrants were outstanding. The company has never paid cash dividends and does not expect to do so in the foreseeable future.
- Audit and controls: Weinberg & Company became the independent auditor in April 2017. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide an internal-control attestation for this smaller reporting company.
Important Facts for Investors to Verify
- Whether revenue and gross margins recover following GNC inventory normalization and the 2017 return reserves.
- The actual availability, borrowing costs, collateral terms and continuing eligibility of receivables under the Compass merchant agreement.
- Whether the company can generate sustainable positive operating cash flow without additional equity or debt financing.
- The collectability of GNC-related receivables and the impact of customer concentration on liquidity.
- The status and potential financial exposure of the Ryan/Testofen litigation and any product-related regulatory matters.
- Whether iSatori stabilizes after the $5.929 million impairment and whether additional impairments are possible.
- The impact of outstanding options, warrants and the 225,000 shares issued to the interim CEO on future dilution.