FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014. The interim condensed consolidated financial statements are unaudited, prepared under GAAP, and described as reviewed. Results are not necessarily indicative of the full year.
Business Context
FitLife Brands develops, manufactures, and distributes nutritional supplements under the NDS, PMD, SirenLabs, and CoreActive brands. Products are sold predominantly through more than 1,100 domestic and international franchised GNC locations. The company is headquartered in Omaha, Nebraska, and trades on the OTCBB under FTLF.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $5.99 million | $5.06 million | $12.32 million | $11.12 million |
| Gross profit | $2.25 million | $1.87 million | $4.61 million | $4.14 million |
| Operating income | $816,591 | $514,880 | $1.74 million | $1.12 million |
| Net income | $725,215 | $470,211 | $1.62 million | $1.06 million |
| Basic EPS | $0.09 | $0.06 | $0.20 | $0.14 |
| Diluted EPS | $0.08 | $0.05 | $0.19 | $0.12 |
- Second-quarter revenue increased 18.4%; first-half revenue increased 10.8%.
- Gross margins were approximately 37.6% in the second quarter and 37.4% for the first half. Operating margins were approximately 13.6% and 14.2%, respectively; net margins were approximately 12.1% and 13.1%.
- Cash provided by operating activities was $811,692 for the first half, down from $1.53 million in the prior-year period. The decline primarily reflected increased accounts receivable and inventory.
- Cash increased to $3.92 million at June 30, 2014 from $3.31 million at December 31, 2013. Net working capital was $7.18 million, compared with $5.66 million at June 30, 2013.
- Accounts receivable increased to $2.50 million from $1.26 million at December 31, 2013, and inventory increased to $3.18 million from $2.75 million.
- Total debt was $2.63 million, consisting of a $437,089 revolving line of credit and a $2.19 million term loan. The current portion of debt was $935,089 and long-term debt was $1.70 million.
- The line of credit bears interest at 3.0% plus one-month LIBOR and matures May 15, 2015. The term loan bears fixed interest at 3.6% and matures August 15, 2018.
- Current assets of $10.38 million exceeded current liabilities of $3.19 million, implying a current ratio of approximately 3.2.
Material Changes Versus Prior Comparable Period
- Revenue growth was attributed to continued domestic and international demand and increased customer purchases ahead of GNC’s transition to a centralized distribution platform effective May 1, 2014.
- Gross profit increased 20.5% in the second quarter and 11.3% in the first half, while operating income increased 58.6% and 55.9%, respectively.
- General and administrative expense increased in the second quarter due principally to higher personnel costs and amounts related to settlement of previously disclosed legal matters, but declined for the first half because of lower non-cash equity issuance expense.
- Selling and marketing expense declined 5.8% in the second quarter and 6.3% for the first half, primarily because of lower sample-pack costs.
- Interest expense increased to $49,393 for the first half from $8,040, while the company repaid $242,397 of term-loan principal.
- The company recognized $87,500 of other income for the first half, reflecting a $137,500 gain associated with acquiring additional ownership of kaniwa protein extraction intellectual property, partially offset by a $50,000 write-off of its remaining YogaEarth investment.
- Common shares outstanding increased to 8,190,368 at June 30, 2014 from 8,110,853 at December 31, 2013. The company also issued options and shares for services.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects cash from operations and existing cash resources to provide liquidity for the next 12 months and stated that the company has remained cash-flow positive without needing additional working capital since the fourth quarter of 2010.
- No formal earnings or revenue guidance was provided. Management expects continued store and product expansion and believes international expansion may become a significant growth driver.
- The GNC centralized distribution transition may change the presentation and comparability of revenue and cost of goods sold. Distribution expense previously included in cost of goods sold is expected to be reflected as an offset to revenue through distributor-level pricing adjustments. Management was still evaluating the potential effect on third-quarter results.
- The company relies substantially on GNC franchise locations and faces risks related to key customers, competition, market demand, product performance, suppliers, personnel, and regulatory or accounting changes.
- Management reported no material litigation, no defaults upon senior securities, no additional risk factors beyond those in the 2013 Form 10-K, and no material changes in internal controls. Disclosure controls and internal control over financial reporting were deemed effective.
- Subsequent to quarter-end, the CEO’s employment agreement was extended to June 30, 2016, with a $265,000 annual salary and potential $50,000 cash bonus. He received 100,000 restricted shares subject to three-year vesting.
- The company reported approximately $19.64 million of federal net operating loss carryforwards available through 2032, subject to potential Section 382 and other limitations. The filing also reports a $689,000 deferred tax asset and valuation allowances; the precise reconciliation of these disclosures should be reviewed.
Investor Verification Checklist
- Verify the effect of GNC’s centralized distribution platform on third-quarter revenue, reported cost of goods sold, gross margin, and customer concentration.
- Assess the collectability and aging of the $2.50 million accounts receivable balance and the cash-flow effect of increased inventory.
- Review the terms, borrowing base, maturity, and renewal prospects of the revolving line of credit, which matures in May 2015.
- Separate recurring operating performance from the $137,500 intellectual-property gain and the $50,000 YogaEarth investment write-off.
- Reconcile the deferred tax asset, valuation allowance, and net operating loss carryforward disclosures.
- Evaluate dilution from outstanding options, warrants, service-related equity issuances, and the subsequent 100,000 restricted-share grant.
- Review the company’s dependence on GNC, international growth assumptions, and the risk factors incorporated by reference from the 2013 Form 10-K.