Business Context and Reporting Period
FitLife Brands, Inc., formerly Bond Laboratories, Inc., develops and distributes nutritional supplements under NDS, PMD, SirenLabs and CoreActive brands. Products are sold predominantly through franchised GNC locations in the United States and internationally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods.
- Approximately 50 products were marketed through more than 800 domestic GNC franchise locations and approximately eight other countries.
- The company changed its name to FitLife Brands, Inc. and began trading under the symbol FTLF on October 28, 2013.
- A one-for-ten reverse stock split became effective September 30, 2013.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $4.892 million | $4.591 million | $16.008 million | $14.722 million |
| Gross profit | $1.750 million | $1.635 million | $5.885 million | $5.357 million |
| Gross margin | 35.8% | 35.6% | 36.8% | 36.4% |
| Operating income | $483 thousand | $469 thousand | $1.601 million | $1.967 million |
| Operating margin | 9.9% | 10.2% | 10.0% | 13.4% |
| Net income | $486 thousand | $467 thousand | $1.543 million | $1.960 million |
| Net margin | 9.9% | 10.2% | 9.6% | 13.3% |
- Basic and diluted earnings per share were $0.06 and $0.05, respectively, in Q3 2013, compared with $0.01 and $0.00 in Q3 2012. Nine-month basic and diluted EPS were $0.20 and $0.17, compared with $0.03 and $0.02.
- Cash provided by operating activities was $2.584 million for the first nine months of 2013, compared with $832 thousand in the prior-year period.
- Cash increased to $6.026 million at September 30, 2013 from $937 thousand at December 31, 2012. Total current assets were $10.806 million and current liabilities were $4.390 million.
- Inventory declined to $2.494 million from $3.685 million at year-end 2012, while accounts receivable increased to $1.526 million from $969 thousand.
- Total debt was $2.992 million, consisting of a $437 thousand revolving line of credit and $2.555 million of term debt. The revolving line matures May 15, 2014; the term loan matures August 15, 2018 and bears fixed interest at 3.6%.
- Management stated that operating cash flow and existing cash resources were expected to provide liquidity for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 6.6%; management stated that revenue increased 18.0% after excluding approximately $445 thousand of nonrecurring Q3 2012 revenue associated with products containing DMAA.
- Nine-month revenue increased 8.7%; excluding approximately $2.070 million of nonrecurring DMAA-related revenue in the 2012 period, management calculated growth of 26.6%.
- Q3 operating income and net income were broadly stable despite higher general and administrative expense. Nine-month operating income declined 18.6% and net income declined 21.3%.
- Nine-month general and administrative expense increased to $2.281 million from $1.570 million, including $350 thousand of noncash expense for stock and options issued for services. Selling and marketing expense increased to $1.829 million from $1.636 million.
- The company obtained a $2.6 million U.S. Bank term loan and used the proceeds principally to redeem all Series B preferred stock and redeem half of the Series C preferred stock. The remaining Series C preferred stock and related dividends were converted into common shares.
- All Series B and Series C preferred shares were outstanding at December 31, 2012; none remained outstanding at September 30, 2013. Common shares outstanding were 7,775,322 at September 30, 2013, following the reverse split and recapitalization transactions.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued expansion of domestic and international distribution, new products and the SirenLabs brand to support future growth. International expansion is expected to become a major growth driver, although it was not yet material to revenue.
- The company voluntarily reformulated products to exclude DMAA and has not manufactured DMAA-containing products since June 2012. Comparability with 2012 results is therefore affected by nonrecurring DMAA-related sales.
- Management identified dependence on key customers, competition, market demand, product performance, suppliers, personnel and changes in accounting rules as material business risks. The company relies substantially on GNC franchise distribution.
- Thermolife International filed two patent-infringement actions, and Tawnsaura Group filed one patent-infringement action. Damages were unspecified, management could not estimate a loss range, and the company characterized the overall risk as minimal while intending to defend the claims.
- A separate CycloBolan matter was settled in August 2013 for $36 thousand paid by the insurance carrier, with no cost to the company. The previously disclosed Schick litigation settlement payments ended in July 2013.
- The company reported approximately $21.1 million of federal net operating loss carryforwards, but utilization may be limited by Section 382 and other future equity transactions. A $6.611 million valuation allowance was recorded against deferred tax assets, leaving a net deferred tax asset of $689 thousand.
- Management stated that disclosure controls and internal control over financial reporting were effective as of September 30, 2013. The filing was not subject to an external auditor attestation of internal controls because the company was a small reporting company.
Important Facts for Investors to Verify
- Confirm the post-reverse-split share count, outstanding options and warrants, and the potential dilution from equity instruments.
- Review the term loan amortization, security interests, guarantees, and the May 2014 maturity of the revolving credit facility.
- Assess whether revenue growth excluding DMAA-related 2012 sales is sustainable and whether international expansion produces the expected returns.
- Monitor concentration in GNC and other distribution channels, inventory and receivables trends, and the company’s ability to convert reported earnings into operating cash flow.
- Track the Thermolife and Tawnsaura patent litigation, including any developments that could result in damages, injunctions or product restrictions.
- Evaluate the realizability and potential limitations of the company’s net operating loss carryforwards and deferred tax assets.