Business Context and Reporting Period
FitLife Brands, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019. The company develops and sells nutritional supplements under NDS Nutrition, PMD, SirenLabs, CoreActive, Metis Nutrition, iSatori, BioGenetic Laboratories, and Energize. NDS products are distributed primarily through GNC, while iSatori products are sold through more than 25,000 specialty, mass-market, and online locations.
The company trades under FTLF on the OTC Pink Marketplace. As of May 15, 2019, 1,014,740 common shares were outstanding, following a subsequent reverse/forward split.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $5.878 million | $4.614 million | 27% increase |
| Gross profit | $2.541 million | $1.915 million | 33% increase |
| Gross margin | 43% | 42% | Improved |
| Operating income | $1.202 million | $0.220 million | 446% increase |
| Net income | $1.187 million | $0.218 million | 444% increase |
| Basic EPS | $1.07 | $0.20 | Increased |
| Diluted EPS | $0.94 | $0.20 | Increased |
| Cash flow from operating activities | $(0.121) million | $(0.050) million | Greater use of cash |
Approximate Q1 2019 operating and net margins were 20% each, compared with approximately 5% each in Q1 2018. The filing reported no income tax provision because of available federal net operating loss carryforwards of approximately $28 million, subject to statutory limitations; a 100% valuation allowance remained against deferred tax assets.
At March 31, 2019, cash was $438,000, accounts receivable were $3.817 million, inventory was $2.338 million, and working capital was approximately $3.061 million. Total assets were $7.435 million and total liabilities were $3.885 million.
Related-party notes payable totaled $815,000, including an additional $300,000 advance during the quarter. The unsecured notes bear interest at 9%, require monthly principal and interest payments beginning April 1, 2019, and mature upon a change in control or December 31, 2019. Lease liabilities totaled $323,000 after adoption of ASC 842.
Material Changes Versus the Prior Comparable Period
- Revenue growth was attributed to higher wholesale purchases and a substantial increase in online direct-to-consumer sales. Online sales represented approximately 10% of revenue versus approximately 1% in Q1 2018.
- Gross margin increased primarily because online direct-to-consumer sales carry substantially higher margins and product returns declined.
- General and administrative expense declined to $774,000 from $870,000 due to cost-reduction initiatives, facility subletting, and lower headcount.
- Selling and marketing expense declined to $550,000 from $806,000, primarily because of budgetary controls.
- Operating cash flow remained negative despite reported profitability, principally because accounts receivable increased by $2.244 million. Inventory reductions provided $1.173 million of operating cash.
- Financing activities provided $300,000 in Q1 2019, compared with a $650,000 use of cash in Q1 2018, when the company repaid prior credit facilities and a term loan.
- The company adopted ASC 842 on January 1, 2019, recognizing a $320,000 right-of-use asset and $323,000 of lease liabilities without a cumulative-effect adjustment to accumulated deficit.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that cash from operations, existing cash, and the related-party notes were expected to provide liquidity for the next twelve months. However, the company is dependent on positive operating cash flow and access to additional capital under the notes. Management warned that failure to generate sufficient cash or obtain additional financing could materially harm the business. No formal revenue or earnings guidance was provided.
- GNC represented approximately 80% of gross sales in Q1 2019 and 91% of gross accounts receivable at March 31, 2019, creating significant customer-concentration risk.
- The related-party notes require repayment by December 31, 2019 and are guaranteed by the company’s wholly owned subsidiaries.
- A pending lawsuit, Ryan et al. v. Gencor Nutrients, Inc. et al., concerns alleged misleading claims regarding Testofen, which is used in a limited number of the company’s products. The filing does not provide a clear potential loss amount.
- The company had $225,000 of goodwill and reported no impairment indicators as of March 31, 2019.
- Subsequent to quarter-end, the company completed a 1-for-8,000 reverse split followed by an 800-for-1 forward split, effectively a 1-for-10 reduction in shares. It repurchased 99,212 shares for approximately $566,000 and reported 1,014,740 shares outstanding thereafter.
- The company issued 2,009 common shares for employee and director services and recorded $49,000 of stock-based compensation for shares and options during the quarter.
Important Facts for Investors to Verify
- Whether the sharp improvement in earnings is sustainable after reduced marketing spending and the quarter’s higher online sales mix.
- Collection timing and credit quality of the $3.817 million accounts receivable balance, particularly amounts due from GNC.
- The company’s ability to generate positive operating cash flow and repay the $815,000 related-party notes by their required maturity.
- The financial effect of the approximately $566,000 post-quarter-end share repurchase and reverse/forward stock split.
- The status and potential exposure from the Testofen litigation.
- Actual utilization and expiration limitations applicable to the approximately $28 million of federal net operating loss carryforwards.
- The filing’s forward-looking statements and risk factors, which remain subject to significant uncertainties and are not guarantees of future performance.