Business Context and Reporting Period
FitLife Brands, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015, with comparative 2014 results. The company develops and sells nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis Nutrition, iSatori, CT Fletcher, BioGenetic Laboratories and Energize brands.
The iSatori merger closed effective October 1, 2015; therefore, consolidated 2015 results include iSatori for the fourth quarter only. iSatori products are sold through more than 25,000 retail locations, while NDS products are primarily distributed through GNC. Approximately 91% of total 2015 sales were attributable to GNC’s centralized distribution platform.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $17.93 million | $19.96 million | Down 10.1% |
| Gross profit | $6.28 million | $7.09 million | Down 11.5% |
| Gross margin, reported | 40.0% | 35.5% | Up 4.5 points |
| Gross margin, revised presentation | 35.0% | 34.3% | Up 0.7 points |
| Operating income (loss) | $(1.09) million | $1.85 million | Declined |
| Net income (loss) | $(1.17) million | $1.67 million | Declined |
| Basic and diluted EPS | $(0.13) | $0.20 | Declined |
| Cash flow from operations | $(2.46) million | $1.51 million | Declined |
Reported selling and marketing expense was $2.93 million versus $2.38 million, while general and administrative expense increased to $4.14 million from $2.64 million. Interest expense was $90,410 versus $94,667. No impairment of long-lived assets was recorded.
Cash and cash equivalents were $1.53 million at December 31, 2015, compared with $4.35 million at December 31, 2014. Current assets were $9.54 million and current liabilities were $6.53 million, producing working capital of approximately $3.00 million versus $6.42 million in 2014.
Inventory increased to $4.79 million from $2.28 million, and net accounts receivable increased to $2.68 million from $1.69 million. Total debt and notes payable were approximately $2.98 million, including a $1.49 million revolving line of credit and a $1.44 million term loan. Long-term debt, net of current maturities, was $914,138.
Total assets increased to $17.56 million from $10.10 million, substantially reflecting the iSatori acquisition. Stockholders’ equity increased to $10.11 million from $6.71 million, despite the 2015 net loss, primarily due to merger-related stock issuance and purchase accounting.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 10.1%. Core NDS revenue declined 17.4%, primarily because the shift to GNC’s centralized distribution model reduced selling prices by approximately 15% compared with the former direct-sales model.
- iSatori contributed approximately $1.44 million of fourth-quarter revenue and approximately $0.7 million of fourth-quarter net loss.
- General and administrative expense increased by $1.51 million, principally due to merger costs, additional personnel and acquired iSatori expenses.
- Net results included approximately $750,000 of merger-related costs, approximately $135,000 invested in the Metis launch, approximately $75,000 for additional market personnel and approximately $220,000 of incremental legal and other costs that management considers largely non-recurring.
- Operating cash flow turned negative, primarily because of working-capital changes, higher inventory and the $750,000 cash component of the iSatori purchase price.
- Cash used in investing activities was $411,042, including $398,209 for share repurchases. Cash used in financing activities was $660,201, primarily for term-loan principal repayments.
- The company issued 2,315,644 shares to iSatori shareholders, increasing the share count and resulting in dilution. It also issued 370,000 employee and director options and assumed 312,205 iSatori options.
The company changed its treatment of vendor-funded GNC discounts for future periods. The revised method deducts estimated discounts from revenue when products are shipped to GNC rather than recording them later as selling and marketing expense. For 2015, the pro forma revised presentation would show revenue of $17.93 million, gross profit of $6.28 million and gross margin of 35.0%. Management states that operating income and net income are not affected by this presentation change.
Guidance, Outlook, Risks and Unusual Items
Management expects cash on hand, operating cash generation and availability under the U.S. Bank line of credit to fund requirements for the remainder of 2016, but states that additional working capital would be required if the company cannot return to positive operating cash flow.
- Management anticipated 30 or more new products, reformulations and flavor extensions in 2016 and at least one additional Metis product for GNC corporate stores.
- Management identified GNC refranchising, international expansion, Metis distribution and broader iSatori retail placement as potential growth drivers, but provided no quantified revenue or earnings guidance.
- The company was not in compliance with certain financial covenants under its U.S. Bank term loan and revolving line of credit at December 31, 2015. A waiver was obtained, but future compliance is not assured. Without a future waiver, the debt could become immediately due.
- The revolving line of credit had a $3.0 million commitment, a $1.49 million balance at year-end and a stated maturity of May 15, 2016. The filing does not clearly state unused availability at year-end.
- Customer concentration is significant: GNC’s centralized distribution platform accounted for approximately 91% of 2015 sales and a majority of receivables. A reduction in GNC purchases or collection problems could materially affect results.
- The iSatori acquisition creates integration, execution, cost-savings and goodwill-impairment risks. The acquisition added approximately $4.14 million of goodwill and $2.02 million of identifiable intangible assets at acquisition.
- Regulatory, product-labeling, product-liability, recall, supplier, competition and adverse-publicity risks are material because the company relies on third-party manufacturers and operates in a heavily regulated supplement industry.
- A California Proposition 65 matter resulted in a $90,000 accrued settlement, approved April 12, 2016, with payment due April 19, 2016. A separate $60,000 Proposition 65 consent judgment involving iSatori was approved in 2015. A Testofen-related class action remains stayed pending resolution of a related appeal.
- The company trades on the OTCBB, has a limited trading market and does not pay dividends. Management’s intended uplisting to NYSE MKT or Nasdaq was not assured.
The independent registered accounting firm issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2015; no external auditor attestation was required because the company is a smaller reporting company.
Important Facts for Investors to Verify
- Whether the company restored positive operating cash flow and maintained compliance with U.S. Bank covenants after year-end.
- Actual borrowing-base availability, renewal or repayment status of the revolving line of credit, and the timing of scheduled term-loan maturities.
- GNC purchasing trends, receivable concentration and the sustainability of sales following the centralized-distribution transition.
- iSatori integration results, including revenue growth, cost synergies, profitability and potential goodwill or intangible-asset impairment.
- Inventory turnover and the risk of excess, obsolete or discounted inventory following the increase to $4.79 million.
- The effect of the vendor-funded-discount accounting policy on reported revenue, gross margin and comparability with prior periods.
- The status and financial impact of Proposition 65 matters, the Testofen litigation and any additional regulatory or product-liability claims.
- Future dilution from 902,205 outstanding options, 110,620 warrants and other potential equity issuances.