FitLife Brands, Inc. — Form 10-Q Summary
Business context and reporting period
FitLife Brands develops and sells nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories and Energize brands. Products are distributed principally through GNC and through more than 25,000 specialty, mass-market and online locations. The filing covers the three and nine months ended September 30, 2018; financial statements are unaudited. The common stock trades on the OTC Pink market under “FTLF.”
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $4.583 million | $4.026 million | $13.576 million | $14.637 million |
| Gross profit | $1.752 million | $1.475 million | $5.474 million | $4.918 million |
| Gross margin | 38.2% | 36.6% | 40.3% | 33.6% |
| Operating income (loss) | $405,000 | $(483,000) | $857,000 | $(1.308) million |
| Net income (loss) | $365,000 | $(511,000) | $753,000 | $(1.396) million |
| Basic and diluted EPS | $0.03 | $(0.05) | $0.07 | $(0.13) |
- Cash used in operating activities was $318,000 for the first nine months of 2018 versus $248,000 of cash provided in the prior-year period.
- Investing activities provided $4,000, compared with $20,000 used in the prior-year period.
- Financing activities used $415,000, principally reflecting repayment of the U.S. Bank term loan. Cash declined to $533,000 at September 30, 2018 from $1.262 million at December 31, 2017.
- Working capital was approximately $1.447 million at September 30, 2018, compared with $369,000 at December 31, 2017.
- Total assets were $7.300 million and stockholders’ equity was $1.886 million at September 30, 2018. Current liabilities were $5.414 million.
- The prior U.S. Bank line of credit and term loan were fully repaid in January 2018. The company had $1.950 million of secured payable to its factor at September 30, 2018.
Material changes versus the prior comparable period
- Third-quarter revenue increased 14%, but nine-month revenue declined 7%, reflecting weaker GNC traffic, lower unit sales and GNC inventory adjustments. Online sales partially offset the retail decline.
- Gross margin expanded materially, driven by lower vendor-funded discounts, reduced write-offs and product mix. Gross profit increased despite the nine-month revenue decline.
- General and administrative expense declined 24% for the quarter and 22% year to date due to cost reductions, lower headcount and reduced facilities expense. Selling and marketing expense declined 34% for the quarter and 23% year to date due to budgetary controls.
- The company moved from losses to profitability in both the quarter and year-to-date period. No income-tax provision was recorded because of approximately $28 million of federal net operating loss carryforwards, subject to statutory limitations, and a full valuation allowance remained against deferred tax assets.
- Shares outstanding increased to 11,084,545 from 10,681,710 at December 31, 2017, primarily from issuing 402,835 shares for services. Options outstanding increased to 1,392,087, and 450,000 restricted shares were granted to the CEO subject to market and service conditions.
Outlook, risks, contingencies and unusual items
- Management expects operating cash flow, existing cash, proceeds from the subsequent financing and continued access to the Compass factoring arrangement to fund operations for the next 12 months. Management also states that liquidity is dependent on positive operating cash flow and the ability to factor additional receivables.
- The Compass Merchant Agreement is subject to annual renewal, and the filing provides no assurance that it will be renewed. Factoring is with recourse, is secured by substantially all company assets, and carried fees and other charges of approximately $100,000 during the first nine months.
- GNC represented approximately 79% of gross revenue for the first nine months of 2018 and 88% of gross accounts receivable at September 30, 2018, creating significant customer-concentration risk.
- An active lawsuit, Ryan et al. v. Gencor Nutrients, Inc. et al., involves allegations concerning marketing claims for Testofen-containing products. The company uses Testofen in a limited number of products and states that no other litigation is expected to have a material adverse effect.
- On November 13, 2018, after quarter-end, the company raised $600,000 through 600 units of newly designated Series A Convertible Preferred Stock and warrants for 391,304 common shares. The preferred stock has a 12% compounded dividend, seniority to common stock, conversion rights at $0.46 per share and significant consent and governance rights.
- Management is pursuing omnichannel and e-commerce growth, but online channels were not material during the reported periods. The filing provides no formal revenue or earnings guidance.
- Management reported effective disclosure controls and internal control over financial reporting as of September 30, 2018.
Important facts for investors to verify
- Whether GNC retail weakness continues and whether online growth can offset declining store traffic and inventory adjustments.
- The renewal terms, availability, costs and recourse exposure of the Compass factoring facility.
- Whether operating cash flow turns positive, given $318,000 of year-to-date operating cash use and only $533,000 of quarter-end cash before the subsequent financing.
- The dilution, dividend obligations, liquidation preference, conversion terms and governance restrictions associated with the new preferred financing and warrants.
- The status and potential financial exposure of the Testofen-related litigation.
- The continuing concentration of revenue and receivables with GNC and the effect of customer returns, discounts and allowances on reported margins.