FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016. The interim consolidated financial statements are unaudited and should be read with the 2015 Form 10-K. The company is a small reporting company whose common stock trades on OTC:PINK under FTLF. The June 30, 2016 share count was 10,408,264; 10,413,621 shares were outstanding as of August 15, 2016.
Business context
FitLife develops and sells nutritional supplements under the NDS, PMD, SirenLabs, CoreActive, Metis Nutrition, iSatori, CT Fletcher, BioGenetic Laboratories and Energize brands. Products are sold principally through GNC and, following the October 2015 iSatori merger, through more than 25,000 specialty, mass-market and online retail locations.
The iSatori acquisition materially affects year-over-year comparability. iSatori contributed $2.7 million of second-quarter revenue and $5.0 million for the six-month period.
Financial performance
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $8.663 million | $5.027 million | $16.275 million | $8.869 million |
| Gross profit | $3.812 million | $1.936 million | $7.159 million | $3.512 million |
| Gross margin | 44.0% | 38.5% | 44.0% | 39.6% |
| Operating income | $1.218 million | $0.287 million | $2.136 million | $0.272 million |
| Operating margin | 14.1% | 5.7% | 13.1% | 3.1% |
| Net income | $1.079 million | $0.244 million | $1.893 million | $0.201 million |
| Net margin | 12.5% | 4.8% | 11.6% | 2.3% |
| Diluted earnings per share | $0.09 | $0.03 | $0.17 | $0.02 |
- Revenue increased 72.3% in the quarter and 83.5% year to date. Excluding iSatori, management reported increases of $966,163 for the quarter and $2.387 million for the six months.
- Gross profit increased primarily because of higher sales volumes and iSatori revenue. General and administrative expense increased to $1.356 million for the quarter and $2.746 million year to date, principally due to iSatori integration.
- Selling and marketing expense increased to $1.111 million for the quarter and $2.027 million year to date, primarily because of iSatori. Depreciation and amortization increased to $126,000 for the quarter and $251,000 year to date.
- Interest expense was $27,172 for the quarter and $56,601 year to date. Income tax expense was $114,000 for the quarter and $189,000 year to date.
Cash flow, liquidity and debt
| Metric | June 30, 2016 | December 31, 2015 |
|---|---|---|
| Cash | $1.940 million | $1.533 million |
| Accounts receivable, net | $6.382 million | $2.685 million |
| Inventory | $3.649 million | $4.790 million |
| Current assets | $12.206 million | $9.536 million |
| Current liabilities | $7.147 million | $6.533 million |
| Total debt | $3.235 million | $2.984 million |
| Total liabilities | $7.791 million | $7.448 million |
| Stockholders’ equity | $12.083 million | $10.111 million |
- Operating activities provided $176,610 during the first six months of 2016 versus $693,302 in the comparable 2015 period. The reduction was driven principally by a $3.698 million increase in accounts receivable, partly offset by lower inventory.
- Investing activities used $19,592, primarily for property and equipment. Financing activities provided $250,548, including a $520,000 draw on the U.S. Bank line of credit and $269,452 of note repayments.
- Cash increased by $407,566 to $1.940 million during the first six months. Current assets exceeded current liabilities by approximately $5.059 million, and the reported current ratio was approximately 1.7.
- Debt consisted principally of a $2.010 million revolving line of credit, a $1.179 million term loan and $45,019 of equipment-related notes. The revolving line was scheduled to mature May 15, 2016 and had been extended to August 15, 2016; the term loan matures August 15, 2018.
- Management stated that expected operating cash flow and existing cash resources should provide liquidity for the next 12 months, while also stating an intention to repay the credit-line borrowings and term-loan principal as soon as practicable.
Material changes and unusual items
- The iSatori merger expanded the product portfolio and distribution footprint and was the principal driver of the substantial year-over-year revenue increase. It also increased operating expenses and working-capital requirements.
- The company changed its treatment of vendor-funded discounts for indirect distribution. Discounts are now estimated and recorded as a reduction of revenue when products are shipped to GNC distribution centers rather than recorded later as selling and marketing expense. The company stated that the change does not affect operating income or net income.
- A $270,724 vendor-funded discount related to the first quarter was reclassified from selling and marketing expense to contra-revenue in the six-month presentation. Management stated that the reclassification was not material and did not affect operating or net income.
- The company recorded a $689,000 net deferred tax asset and reduced its valuation allowance based on expected utilization of net operating losses. It also reported approximately $21 million of federal and $2.3 million of Colorado net operating loss carryforwards, subject to possible limitations.
- During the quarter, the company issued 5,357 shares for director services and granted 291,000 stock options subject to three-year vesting. It did not repurchase shares during the quarter.
Outlook, risks and contingencies
Management expects continued revenue growth from new and reformulated products, increased GNC distribution, international expansion and iSatori products. It expects selling and marketing expense to rise with sales but at a slower rate. No specific numerical revenue, earnings or cash-flow guidance was provided.
- Key identified risks include reliance on GNC and other key customers, competition, market demand, product performance, supplier relationships, personnel retention, accounting-rule changes and the integration of iSatori.
- Accounts receivable increased substantially, creating a material working-capital and collection consideration. The company recorded $2,991 of bad-debt expense for the quarter.
- The company settled an Environmental Research Center Proposition 65 matter for $90,000, paid April 18, 2016.
- A stayed putative class action alleges misleading claims concerning Testofen products. The company also faces a trademark counterclaim involving Metis Nutrition and Met-Rx. Management stated that it does not believe the disclosed litigation will have a material adverse effect, but outcomes remain uncertain.
- The company reported no defaults on senior securities, no additional risk factors beyond those in its 2015 Form 10-K, no subsequent events through the filing date, and effective disclosure and internal financial-reporting controls based on management’s assessment.
Investor verification checklist
- Verify the extension, availability and repayment terms of the $3.0 million revolving credit facility, including its August 15, 2016 maturity date and borrowing-base collateral.
- Assess accounts-receivable aging, customer concentration and collection performance following the increase to $6.382 million.
- Reconcile revenue and selling-and-marketing expense under the vendor-funded discount policy, including the $270,724 first-quarter reclassification.
- Evaluate whether iSatori’s revenue contribution and integration costs are sustainable and whether reported growth is comparable with pre-merger periods.
- Review the realizability and potential Section 382 limitations of the deferred tax assets and net operating loss carryforwards.
- Monitor the Testofen litigation, Metis Nutrition trademark dispute and any additional product-labeling or regulatory claims.
- Confirm debt repayment capacity given only $176,610 of operating cash flow generated during the first six months despite $1.893 million of net income.