FitLife Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
FitLife Brands, Inc. develops and markets nutritional supplements under the NDS, PMD, SirenLabs, CoreActive, Metis, iSatori, BioGenetic Laboratories, and Energize brands. NDS products are distributed principally through GNC, while iSatori products are sold through more than 25,000 specialty, mass-market, and online locations. This unaudited quarterly report covers the three months ended March 31, 2017, with comparisons to the same period in 2016.
The company is headquartered in Omaha, Nebraska, trades on the OTC:PINK market under “FTLF,” and reported 10,470,158 common shares outstanding as of May 15, 2017.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $5.589 million | $7.883 million | Down 29.1% |
| Gross profit | $1.921 million | $3.618 million | Down 46.9% |
| Gross margin | 34.4% | 45.9% | Down 11.5 percentage points |
| Operating income (loss) | $(306,229) | $918,018 | Declined $1.224 million |
| Operating margin | (5.5%) | 11.6% | Down 17.1 percentage points |
| Net income (loss) | $(332,890) | $814,154 | Declined $1.147 million |
| Basic diluted EPS | $(0.03) | $0.08 / $0.07 | Changed to a loss |
| Cash flow from operations | $(22,573) | $(1.203 million) | Improved by $1.180 million |
Cost of goods sold was $3.669 million, compared with $4.265 million. General and administrative expense declined to $1.160 million from $1.379 million, selling and marketing expense declined to $947,386 from $1.197 million, and depreciation and amortization declined to $119,338 from $124,756. Interest expense was $26,661.
At March 31, 2017, cash was $1.133 million, total current assets were $8.662 million, and total current liabilities were $5.451 million, implying working capital of approximately $3.211 million and a current ratio of approximately 1.59. Accounts receivable were $4.386 million and inventory was $2.896 million.
Total debt was $2.739 million, consisting primarily of a $1.950 million revolving line of credit and a $779,522 term loan balance. Approximately $2.510 million was classified as current, and $229,779 was long-term. The revolving credit facility carried interest at 3.0% plus one-month LIBOR and matured June 15, 2017. The term loan carried a fixed 3.6% rate and matured August 15, 2018.
Material Changes Versus the Prior Comparable Period
- NDS revenue decreased 21.6% to $4.128 million. Management stated that a $700,000 margin-support credit memorandum with GNC, entered into in April 2017, was included in Q1 2017 revenue; excluding that item, NDS revenue decreased 8.3% to $4.828 million.
- iSatori revenue decreased 44.3% to $1.461 million, principally because fewer new products were introduced during the quarter.
- GNC sales were approximately $5.220 million, or 83% of total revenue, compared with $6.244 million, or 79%, in Q1 2016. GNC represented approximately 88% of accounts receivable at March 31, 2017.
- Gross margin contracted materially, and the company moved from operating and net profitability to losses despite lower operating expenses.
- Cash used in operations improved substantially, primarily from working-capital changes, including lower inventory and increased accounts payable. Financing activities used $137,320, principally for debt repayments, compared with $385,834 of financing cash provided in Q1 2016.
- Inventory declined from $3.757 million at December 31, 2016 to $2.896 million at March 31, 2017, while accounts receivable increased from $2.793 million to $4.386 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects operating cash flow and existing cash resources to provide liquidity for the next 12 months, but also stated that it intends to repay the revolving credit balance and term-loan principal as soon as practicable.
- Management expects new product introductions beginning in the quarter ending June 30, 2017, as well as additional GNC distribution and iSatori growth, to support future revenue. No assurance was provided.
- The company was not in compliance with certain debt covenants at March 31, 2017, but subsequently obtained a waiver. The filing does not provide the specific covenant terms or waiver conditions.
- Goodwill of $4.422 million and indefinite-lived intangible assets of $220,000 remained on the balance sheet. Management did not identify an interim impairment trigger, but stated that the annual 2017 impairment test could result in an impairment charge depending on forecasts and market conditions.
- The company’s results include a $700,000 one-time GNC margin-support credit memorandum. Management stated that, excluding this item, Q1 2017 would have produced net income of approximately $367,110 rather than a reported net loss.
- Customer concentration, dependence on GNC, competition, product demand and performance, supplier relationships, personnel, and changes in accounting requirements were identified as principal business risks.
- The company is involved in litigation concerning products containing Testofen and a separate lawsuit alleging misleading claims for HCG Activator. Management expected the HCG Activator matter to be dismissed under a proposed resolution and did not expect a material financial impact. The filing states that no other litigation was expected to have a material adverse effect.
- The company had approximately $22.4 million of federal net operating loss carryforwards and maintained a $7.014 million valuation allowance against related tax benefits. It also maintained a deferred tax asset of $689,000.
- Management stated that disclosure controls and internal control over financial reporting were effective as of March 31, 2017, with no material changes during the quarter.
Investor Verification Points
- Verify the economic and accounting treatment, timing, and collectability of the $700,000 GNC margin-support credit memorandum.
- Verify the status of the revolving credit facility, its June 15, 2017 maturity, covenant waiver, borrowing-base availability, and refinancing or repayment plans.
- Assess GNC concentration, including the 83% revenue and 88% receivables exposure, and the effect of GNC inventory levels and store-credit conditions.
- Monitor iSatori revenue recovery and whether anticipated product introductions beginning in Q2 2017 occur as planned.
- Evaluate the risk of goodwill or indefinite-lived intangible-asset impairment in the 2017 annual test.
- Review the pending Testofen and HCG Activator litigation and any resulting settlement, legal costs, or product-marketing restrictions.
- Reconcile the filing’s share counts: the balance sheet reports 10,470,158 shares outstanding at March 31, 2017, while the notes and EPS disclosure reference 10,441,469 shares.