FitLife Brands, Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
FitLife Brands, Inc. is a nutritional-supplement company offering NDS, PMD, Siren Labs, Core Active, Metis Nutrition and iSatori brands. Products are sold primarily through GNC and through specialty, mass-market and online retail channels. The filing covers the fiscal year ended December 31, 2016, compared with the year ended December 31, 2015; it is not a standalone fourth-quarter filing.
The iSatori merger became effective October 1, 2015, making 2016 the first full fiscal year reflecting iSatori operations. The company issued 2,315,644 common shares in connection with the merger.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $25.314 million | $17.931 million | +41.2% |
| Gross profit | $10.071 million | $6.278 million | +60.4% |
| Gross margin | 39.8% | 35.0% | +4.8 percentage points |
| Operating income | $472,265 | $(1.090) million | Improved by $1.562 million |
| Operating margin | 1.9% | (6.1)% | Improved |
| Net income | $368,078 | $(1.166) million | Returned to profitability |
| Basic diluted EPS | $0.04 / $0.03 | $(0.13) / $(0.13) | Improved |
| Cash flow from operations | $(88,416) | $(2.455) million | Improved by $2.367 million |
Cost of goods sold increased 30.8% to $15.243 million. General and administrative expense increased to $5.002 million, selling and marketing expense increased to $4.118 million, and depreciation and amortization increased to $478,235, primarily due to iSatori integration and operations.
At December 31, 2016, cash was $1.293 million, accounts receivable were $2.793 million, inventory was $3.757 million, total current assets were $8.126 million and total assets were $15.546 million. Total liabilities were $5.013 million and stockholders’ equity was $10.533 million. The current ratio was approximately 1.75.
Total debt and notes payable were $2.877 million, including a $1.950 million revolving credit balance, $914,002 of term debt and $12,700 of equipment-related notes. The revolving facility had a $3.000 million commitment, bore interest at 3.0% plus one-month LIBOR and matured June 15, 2017. The term loan bore fixed interest of 3.6% and matured August 15, 2018.
Investing cash outflow was $70,995 and financing cash outflow was $80,099. The company drew $459,695 under its line of credit and repaid $539,794 of notes and long-term debt. Cash declined by $239,510 during the year.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, including $7.094 million of iSatori revenue and 10.7% growth in NDS Nutrition revenue.
- The company moved from a $1.166 million net loss to $368,078 of net income, helped by higher sales, iSatori revenue and stronger gross margins.
- Operating cash use narrowed materially but remained negative, indicating that reported profitability did not yet translate into positive operating cash flow.
- Inventory declined from $4.790 million to $3.757 million, while accounts receivable increased from $2.685 million to $2.793 million.
- Accounts payable declined from $3.364 million to $1.597 million, and total liabilities declined from $7.448 million to $5.013 million.
- The company introduced 55 products during 2016, consisting of 24 new products and 31 reformulations or flavor extensions.
- 2016 included only a full year of iSatori operations, while 2015 included iSatori results beginning October 1. Accordingly, reported year-over-year comparisons are affected by the merger and are not fully organic.
Guidance, Outlook, Risks and Unusual Items
Management expected cash from operations, availability under the U.S. Bank line of credit and existing cash resources to fund liquidity for the next 12 months. Management anticipated continued revenue growth from GNC distribution, Metis Nutrition, iSatori products, new product launches and international expansion, but provided no formal numerical revenue or earnings guidance.
Management expected to launch a similar number of new and reformulated products in 2017 and expected selling and marketing expense to rise more slowly than revenue. The filing states that the company was not in compliance with certain bank covenants at December 31, 2016, principally due to lower third-quarter revenue. U.S. Bank granted waivers for the relevant defaults. A future uncured breach could result in acceleration of amounts owed and materially affect liquidity.
GNC represented $21.898 million, or 87%, of 2016 revenue, and accounted for 83% of year-end accounts receivable. The filing also identifies dependence on GNC, competitive pressure, regulatory requirements, product liability and recall risks, reliance on third-party manufacturers, key-person risk and limited trading liquidity as material risks.
In April 2017, FitLife agreed to provide GNC with $700,000 of margin-support credits, recognized in installments through September 2017. These credits will reduce net income in the affected periods and are an important post-balance-sheet item.
The company disclosed litigation involving claims related to Testofen marketing and sales; the matter was expected to be reinstated following appellate developments. A separate METIS NUTRITION trademark dispute was settled in August 2016, allowing continued use of the mark under specified conditions. No impairment charge was recorded for goodwill or intangible assets in 2016.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because of the company’s smaller-reporting-company exemption.
Most Important Facts to Verify
- Reconcile the company’s customer-concentration disclosures: the filing reports GNC as 87% of 2016 revenue in one section and describes approximately 82% in another.
- Review the U.S. Bank credit agreement, covenant calculations, waiver terms and the status of the revolving facility after its June 15, 2017 maturity.
- Assess the cash impact and income-statement timing of the $700,000 GNC margin-support credits.
- Evaluate whether negative operating cash flow, GNC concentration and accounts-receivable exposure create funding or collection risk.
- Review the Testofen-related litigation, potential damages and insurance coverage.
- Assess the carrying value and future impairment risk of $6.508 million of net intangible assets and goodwill included in the business combination.
- Confirm post-filing share counts, option and warrant dilution, treasury-share cancellations and the company’s current trading venue and liquidity.