FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 9, 2019. Financial statements are unaudited. FitLife markets nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories, and Energize brands. Products are sold primarily through GNC and more than 25,000 specialty, mass-market, and online locations.
Financial Performance and Position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $4.618 million | $4.379 million | $10.496 million | $8.993 million |
| Gross profit | $1.854 million | $1.806 million | $4.395 million | $3.722 million |
| Gross margin | 40.1% | 41.2% | 41.9% | 41.4% |
| Operating income | $429,000 | $214,000 | $1.631 million | $452,000 |
| Net income | $547,000 | $170,000 | $1.734 million | $388,000 |
| Net income available to common shareholders | $529,000 | $170,000 | $1.716 million | $388,000 |
| Diluted EPS | $0.43 | $0.16 | $1.36 | $0.36 |
- Operating expenses were $1.425 million in the second quarter and $2.764 million for the first six months, down 10% and 15%, respectively, year over year. General and administrative and selling and marketing expenses declined from cost-reduction and optimization initiatives.
- Interest expense declined to $18,000 in the quarter and $33,000 year to date, compared with $44,000 and $65,000 in the comparable periods.
- Cash provided by operating activities was $988,000 for the six months ended June 30, 2019, compared with $882,000 in 2018. Investing activities used or provided no material cash.
- Cash used in financing activities was $330,000, including $140,000 of note repayments, $18,000 of preferred dividends, and $472,000 of common-stock repurchases, partially offset by $300,000 of related-party borrowings.
- Cash increased from $259,000 at December 31, 2018 to $917,000 at June 30, 2019. Working capital was approximately $3.112 million, compared with $1.890 million at year-end 2018.
- At June 30, 2019, total assets were $7.634 million and total liabilities were $4.060 million. Accounts receivable were $3.220 million, inventories were $2.712 million, and stockholders’ equity was $3.574 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 5%, while six-month revenue increased 17%. Management attributed growth to stabilizing wholesale trends and expansion of the online direct-to-consumer channel.
- Online sales represented approximately 13.5% of second-quarter revenue versus 4.5% in the prior-year quarter; six-month online sales represented approximately 11.5% versus approximately 2.8% in the prior-year period.
- Second-quarter gross margin decreased to 40.1%, primarily because of increased promotional activity in the iSatori wholesale business. Six-month gross margin improved to 41.9%, supported by higher-margin online sales.
- Operating income increased 100% in the quarter and 261% for the six months, reflecting higher revenue and lower operating expenses.
- Net income included a $142,000 gain from settlement of a trademark infringement suit. This gain contributed to the year-over-year earnings increase and may not recur.
- The company adopted ASC 842 for leases on January 1, 2019, recognizing a $293,000 right-of-use asset and $297,000 of operating lease liabilities at June 30, 2019. The initial lease assets and liabilities recognized at adoption were $480,000 each.
- In April 2019, the company repurchased 99,238 common shares for $566,000; $94,000 remained unpaid at June 30, 2019 and was recorded in accrued liabilities.
- The company completed a reverse/forward stock split effective April 16, 2019. The filing retroactively adjusts share and per-share information for the resulting 1-for-10 effect.
Debt, Liquidity, Outlook, and Risks
- Related-party notes payable totaled $693,000 at June 30, 2019, including $15,000 of accrued interest. The notes bear interest at 9%, are unsecured, are guaranteed by the company’s subsidiaries, and mature upon a change in control or December 31, 2019, whichever occurs earlier.
- Management stated that existing cash, operating cash flow, and anticipated access to the related-party financing would be sufficient for liquidity needs over the next twelve months. Management also stated that it does not currently intend to raise additional equity or debt.
- Management cautioned that failure to generate positive operating cash flow, lack of access to additional capital under the notes, or inability to obtain other financing could materially harm the business.
- GNC represented 78.1% of gross sales before vendor-funded discounts and coupons for the first six months of 2019. GNC-related gross accounts receivable represented 93.3% of total accounts receivable at June 30, 2019, creating significant customer-concentration risk.
- The company had approximately $29.1 million of federal net operating loss carryforwards, subject to statutory limitations, and maintained a 100% valuation allowance against deferred tax assets.
- A lawsuit involving Testofen-related marketing claims remains pending but was stayed on June 14, 2019 while a related appeal proceeds. Management stated that no other pending litigation is expected to have a material adverse effect.
- The filing identifies no new risk factors beyond those disclosed in the 2018 Form 10-K. Forward-looking statements remain subject to operating, financing, customer-concentration, litigation, product-return, inventory, and market risks.
- Management reported that disclosure controls and internal control over financial reporting were effective as of June 30, 2019, with no material changes during the quarter.
Important Facts for Investors to Verify
- Whether the company can repay or refinance the $693,000 of related-party notes due by December 31, 2019.
- Whether online sales growth and wholesale stabilization continue without excessive promotional activity or gross-margin pressure.
- The sustainability of earnings excluding the nonrecurring $142,000 legal-settlement gain.
- GNC’s financial condition and the effect of its concentration on revenue and receivables.
- Whether operating cash flow remains sufficient to fund working capital, lease obligations, debt service, and other commitments.
- The potential financial or operational impact of the stayed Testofen-related litigation and any future product or marketing claims.
- The effect of the reverse/forward stock split, treasury-stock repurchase, options, warrants, and related dilution on per-share value.