FitLife Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands develops and sells nutritional supplements under the NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories, and Energize brands. Products are distributed principally through GNC and through specialty, mass-market, and online retailers. The report covers the unaudited three months ended March 31, 2018, with comparison to the three months ended March 31, 2017. The company is a small reporting company whose common stock trades on OTC:PINK under FTLF.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $4.614 million | $5.589 million |
| Gross profit | $1.916 million | $1.921 million |
| Gross margin | 41.5% | 34.4% |
| Operating income (loss) | $220,337 | $(306,229) |
| Net income (loss) | $217,390 | $(332,890) |
| Net income (loss) per share | $0.02 | $(0.03) |
| Net cash used in operating activities | $(49,743) | $(22,573) |
| Cash at period end | $564,772 | $1.133 million |
At March 31, 2018, total assets were $6.025 million, total current liabilities were $4.803 million, and stockholders’ equity was $1.222 million. Working capital was approximately $700,194. Current assets included $2.210 million of factored receivables and $2.385 million of inventory.
The company repaid its $1.950 million line of credit and $414,877 term loan in January 2018. Both U.S. Bank obligations were fully settled as of March 31, 2018. The company instead reported a $1.715 million secured payable to its receivables factor under the Compass Merchant Agreement. The agreement supports factoring of receivables up to $5.0 million, is guaranteed by the company, bears fees based on LIBOR plus 550 basis points, and is secured by substantially all company assets.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17.4%, primarily because of lower GNC traffic, lower retail unit sales, GNC inventory adjustments, and weaker distribution-partner performance.
- NDS revenue decreased to $3.588 million from $4.128 million; iSatori revenue decreased to $1.026 million from $1.461 million.
- Gross profit was essentially stable despite lower revenue because gross margin increased to 41.5%. Management attributed the improvement in part to the effect of a $700,000 non-recurring GNC margin-support charge recorded in the 2017 comparable period; excluding that item, 2017 gross margin would have been approximately 41.7%.
- General and administrative expense declined 25.0% to $870,382, while selling and marketing expense declined 14.9% to $806,109, reflecting cost reductions, lower headcount, budget controls, and facility subletting.
- Depreciation and amortization declined to $18,840 from $119,338, principally following the write-off of certain intangible assets in the fourth quarter of 2017.
- The company moved from a $332,890 net loss to $217,390 of net income.
- Cash decreased by $697,162 during the quarter. Financing cash flows included repayment of the U.S. Bank facilities, partly offset by $1.715 million of proceeds associated with receivables factoring.
- Common shares outstanding increased to 10,955,099 from 10,681,710, including 273,389 shares issued for employee and director services valued at $82,501.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that GNC and broader retail trends may have begun to stabilize, but provided no assurance. The company is pursuing omnichannel sales through retail partners, direct response, and e-commerce.
- Management expects operating cash flow and existing resources to support liquidity for the next 12 months, but also stated that liquidity depends on positive operating cash flow and continued access to the Compass factoring arrangement.
- The company acknowledged that a failure to generate sufficient revenue or obtain additional factoring or other capital could materially harm the business. Management currently does not intend to raise additional equity or debt capital.
- Customer concentration is significant: GNC represented approximately 82% of gross sales in Q1 2018 and 86% of gross accounts receivable at March 31, 2018.
- Factored receivables are sold with recourse and are accounted for as secured financing. During the quarter, the company factored gross invoices of $5.037 million and incurred $17,400 of related fees and interest.
- An active lawsuit, Ryan et al. v. Gencor Nutrients, Inc. et al., concerns alleged misleading claims involving Testofen, which is used in a limited number of the company’s products. The filing does not provide a clear estimate of potential loss or exposure.
- The company adopted the new revenue-recognition standard effective January 1, 2018, with no quantitative impact on the financial statements. It was evaluating the future impact of the new lease standard, effective for periods beginning after December 15, 2018.
- Management reported effective disclosure controls and internal control over financial reporting as of March 31, 2018, with no material changes during the quarter.
Important Facts for Investors to Verify
- Whether the reported improvement in profitability can persist despite the 17.4% revenue decline and continuing dependence on GNC.
- The availability, cost, renewal terms, collateral requirements, and recourse exposure of the Compass factoring facility.
- Actual cash conversion and operating cash flow, given the quarter’s $49,743 operating cash outflow and cash balance of $564,772.
- GNC’s inventory levels, traffic trends, purchasing patterns, and any further changes to the company’s principal distribution channel.
- The potential financial impact and status of the Testofen-related litigation.
- The effect of the 273,389 shares issued for services and the dilutive impact of 810,284 outstanding options and 43,300 warrants.
- Whether management’s 12-month liquidity assessment remains supportable if operating cash flow stays negative or factoring capacity becomes unavailable.