FitLife Brands, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; filed November 12, 2021. FitLife develops and markets nutritional supplements under multiple brands, with significant distribution through GNC, specialty retail, mass retail, and online channels. The filing contains unaudited interim financial statements.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $6.705 million | $6.923 million | $21.004 million | $15.814 million |
| Gross profit | $2.945 million | $2.862 million | $9.583 million | $6.918 million |
| Gross margin | 43.9% | 41.3% | 45.6% | 43.7% |
| Operating income | $1.431 million | $1.660 million | $4.887 million | $2.854 million |
| Net income | $1.125 million | $1.645 million | $4.317 million | $2.981 million |
| Diluted EPS | $0.93 | $1.45 | $3.59 | $2.63 |
| Adjusted EBITDA | $1.556 million | $1.688 million | $5.273 million | $2.954 million |
- Cash flow: Nine-month cash provided by operating activities was $3.200 million, compared with $3.475 million in the prior-year period. Investing cash use was $529,000, primarily for the Nutrology acquisition. Financing cash use was $390,000, including share and option repurchases.
- Liquidity: Cash was $8.617 million at September 30, 2021, compared with $6.336 million at December 31, 2020. Working capital was approximately $12.287 million, versus $7.744 million at year-end 2020.
- Debt: The $2.5 million secured revolving credit facility had no outstanding balance at September 30, 2021. Its maturity date was extended to September 23, 2022. The $449,700 PPP loan, including accrued interest, was forgiven on January 15, 2021.
- Balance sheet: Total assets were $20.889 million and total liabilities were $4.583 million. Inventory increased to $6.121 million from $3.401 million at December 31, 2020, primarily to reduce the risk of product shortages.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 3% year over year, while nine-month revenue increased 33%. Management attributed the quarterly decline primarily to unusually high GNC restocking purchases in Q3 2020 following GNC’s bankruptcy filing.
- Online revenue increased 39.8% in Q3 and 57.5% for the nine-month period. Online sales represented approximately 25% of Q3 revenue and 24% of nine-month revenue, up from 17% and 20%, respectively.
- Nine-month wholesale revenue increased 26.6%, while Q3 wholesale revenue declined 12.2%.
- Gross margin expanded by 260 basis points in Q3 and 190 basis points for the nine-month period, reflecting a greater mix of higher-margin online sales.
- Q3 operating income decreased 14% and net income decreased 32%, primarily because of higher operating expenses and a $313,000 income-tax provision versus $17,000 in the prior-year quarter. The tax provision was described as substantially non-cash due to net operating loss carryforwards.
- Nine-month operating income increased 71% and net income increased 45%, benefiting from higher revenue and gross margins. The nine-month comparison also includes a $453,000 gain from PPP loan forgiveness in 2021 and a $70,000 settlement gain in 2020.
- General and administrative expense increased primarily because of a temporary increase in consulting expense. Selling and marketing expense increased because of higher cooperative marketing payments to a wholesale partner; management expects this higher level to continue and stated that it is funded by wholesale price increases.
- On April 7, 2021, the Company acquired substantially all assets of Nutrology for total consideration of $529,000. Nutrology contributed $722,000 of revenue and $270,000 of gross profit from the acquisition date through September 30, 2021.
- Shares outstanding increased to 1,125,690 from 1,060,818 at December 31, 2020. The Company repurchased 9,023 shares and 12,710 in-the-money options during the nine-month period; $3.170 million remained available under the repurchase authorization at September 30, 2021.
Guidance, Outlook, Risks, and Unusual Items
- Management expects cash from operations, existing cash, and available credit capacity to provide sufficient liquidity for the next twelve months, but states that no assurance can be given.
- The Company remains significantly dependent on GNC: GNC represented 68% of Q3 revenue and 69% of nine-month revenue. GNC also represented 77% of gross accounts receivable at September 30, 2021.
- COVID-19 continues to create supply-chain, manufacturing lead-time, retail-store, and demand risks. A resurgence could adversely affect product availability, sales, and financial results.
- Inventory was increased substantially to avoid stockouts amid supply-chain disruption. Future obsolescence, excess inventory, or slower demand could affect margins and cash flow.
- The Company had approximately $17.1 million of federal NOL carryforwards and a net deferred tax asset of approximately $3.3 million after a $537,000 valuation allowance. The Tax Benefits Preservation Plan seeks to protect these tax attributes by deterring ownership changes involving holdings of 4.99% or more.
- Management identified no goodwill impairment triggering event during the period, but worsening COVID-19 conditions could lead to future impairment charges.
- The filing reports no material litigation, no defaults on senior securities, and no material changes in internal controls. Management concluded that disclosure controls and internal control over financial reporting were effective.
Investor Verification Priorities
- Verify the sustainability of the 45.6% nine-month gross margin and the continuing contribution from online sales.
- Assess customer concentration and GNC’s financial condition, purchasing patterns, and accounts-receivable exposure.
- Monitor inventory conversion, stockout avoidance benefits, and potential obsolescence or working-capital pressure.
- Separate recurring operating performance from the $453,000 PPP forgiveness gain, acquisition effects, stock compensation, and other non-recurring items.
- Evaluate utilization and realizability of the $17.1 million NOL carryforwards and $3.3 million net deferred tax asset.
- Review the Nutrology acquisition’s post-acquisition revenue, margins, integration progress, and goodwill and intangible-asset assumptions.
- Confirm ongoing availability and terms of the $2.5 million secured revolving credit facility through its September 2022 maturity.