FitLife Brands, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
FitLife Brands is a nutritional-supplement company marketing NDS and iSatori products through GNC, more than 25,000 retail locations, and online direct-to-consumer channels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The company trades on the OTC Pink market under FTLF.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $5.316 million | $4.583 million | $15.812 million | $13.576 million |
| Gross profit | $2.253 million | $1.752 million | $6.649 million | $5.474 million |
| Gross margin | 42.4% | 38.2% | 42.1% | 40.3% |
| Operating income | $876,000 | $405,000 | $2.508 million | $857,000 |
| Net income | $891,000 | $365,000 | $2.625 million | $753,000 |
| Net income available to common shareholders | $872,000 | $365,000 | $2.588 million | $753,000 |
| Diluted EPS | $0.72 | $0.31 | $2.08 | $0.65 |
| Cash flow from operations | Not separately provided | Not separately provided | $1.724 million | $(318,000) |
- Revenue increased 16% in both the quarter and year-to-date period. Management attributed growth to improved wholesale sales and online direct-to-consumer growth.
- Online sales represented approximately 12% of quarterly and year-to-date revenue, compared with 6% and 4%, respectively, in the comparable 2018 periods.
- Operating expenses were $1.377 million in Q3 and $4.141 million year to date. General and administrative expense declined year to date, while quarterly selling and marketing expense increased modestly.
- The year-to-date net-income improvement included lower operating expenses, reduced interest expense, and a $171,000 gain from legal settlements.
- At September 30, 2019, cash was $557,000, accounts receivable were $3.170 million, inventory was $2.482 million, and working capital was approximately $3.224 million.
- Total assets were $6.932 million and stockholders’ equity was $3.665 million at September 30, 2019.
- The company had no outstanding balance under its new $2.5 million revolving credit facility as of the filing date. The facility is secured by all company assets, bears interest at one-month LIBOR plus 2.75%, and matures September 23, 2020 unless renewed.
- Related-party notes totaling $615,000, including accrued interest, were repaid on September 24, 2019. The related-party credit line was terminated.
- Operating lease liabilities totaled $277,000, consisting of $58,000 current and $219,000 long term, following adoption of ASC 842.
- Federal net operating loss carryforwards were approximately $26.6 million, subject to statutory limitations. The company recorded no material income-tax provision for the quarter and only $7,000 year to date.
Material changes versus the prior comparable period
- Quarterly revenue rose 16%, gross profit rose 29%, operating income rose 116%, and net income rose 144%.
- Year-to-date revenue rose 16%, gross profit rose 21%, operating income rose 193%, and net income rose 249%.
- Gross margin expanded by 420 basis points in Q3 and 180 basis points year to date, primarily due to product mix and increased online sales.
- Year-to-date operating cash flow improved by $2.042 million, from a $318,000 use in 2018 to $1.724 million provided in 2019. The improvement included a $1.005 million reduction in inventory and was partly offset by a $1.572 million increase in trade receivables.
- The company repurchased 181,454 common shares year to date for $1.385 million, including 82,216 shares during Q3 for $819,000. Of the year-to-date amount, $496,000 remained unpaid and was recorded in accrued liabilities at September 30.
- Common shares outstanding declined to 933,305 from 1,111,943 at December 31, 2018, while treasury stock increased by $1.385 million.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing a $480,000 right-of-use asset and lease liability at adoption.
Outlook, commentary, risks and unusual items
- Management expects online revenue to continue increasing relative to prior comparable periods because of its focus on higher-margin online sales, although no assurance is provided.
- Management believes cash from operations, existing cash, and available borrowings under the new credit facility will support liquidity for the next twelve months. It also states that additional capital would be required if operating cash flow or credit availability proves insufficient.
- Revenue concentration remains significant: GNC represented approximately 77% of gross revenue and 88% of gross accounts receivable for the nine months ended September 30, 2019.
- The company depends on positive operating cash flow and access to its secured revolving facility. Failure to generate sufficient cash or obtain additional financing could materially harm the business.
- The company settled the Ryan litigation claims against its subsidiary with prejudice; the matter was dismissed October 4, 2019. Legal settlements produced a $171,000 gain year to date.
- On November 6, 2019, the board increased authorized repurchases under the share repurchase program to $2.5 million from $1.0 million.
- Chairman and CEO Dayton Judd and Sudbury Capital Fund were reported to beneficially own approximately 47.7% of voting securities, creating significant control and related-party governance risk.
- The filing identifies ordinary-course estimation risks involving revenue returns, doubtful accounts, inventory obsolescence, goodwill impairment, taxes, and equity-based compensation. No goodwill impairment indicators were identified.
Important facts for investors to verify
- Confirm the sustainability of the 42% gross margin and the growth and profitability contribution from online sales.
- Monitor GNC concentration, customer receivables, payment collections, and any changes in GNC’s operating or financial condition.
- Verify cash conversion, particularly the relationship between reported earnings, operating cash flow, and rising accounts receivable.
- Track drawdowns, collateral requirements, interest costs, covenants, and the September 2020 maturity of the secured revolving credit facility.
- Assess the effect of continued share repurchases, unpaid repurchase obligations, preferred dividends, options, and warrants on liquidity and dilution.
- Review related-party transactions and the influence of the CEO and chairman, including the reported 47.7% voting ownership.
- Confirm the final impact of the settled litigation and whether any additional product, regulatory, or legal contingencies arise.