FitLife Brands, Inc. — Form 10-Q Summary
Business context and reporting period
FitLife Brands, Inc. markets nutritional supplements under NDS, PMD, SirenLabs, CoreActive, Metis Nutrition, iSatori, CT Fletcher, BioGenetic Laboratories, and Energize. NDS products are distributed principally through GNC franchise stores, while iSatori products are sold through more than 25,000 specialty, mass-market, and online locations. The filing covers the three and nine months ended September 30, 2016. The iSatori merger became effective October 1, 2015, making year-over-year comparisons only partially comparable.
The unaudited interim financial statements were prepared under U.S. GAAP and do not include all disclosures required for annual financial statements. The company trades under the symbol FTLF on the OTC Pink market.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $5.34 million | $6.27 million | $21.62 million | $15.14 million |
| Gross profit | $1.99 million | $2.61 million | $9.15 million | $6.12 million |
| Gross margin | 37.2% | 41.7% | 42.3% | 40.5% |
| Operating income (loss) | $(0.36) million | $0.44 million | $1.78 million | $0.71 million |
| Operating margin | (6.7%) | 7.1% | 8.2% | 4.7% |
| Net income (loss) | $(0.36) million | $0.38 million | $1.53 million | $0.58 million |
| Net margin | (6.8%) | 6.1% | 7.1% | 3.9% |
| Diluted EPS | $(0.03) | $0.04 | $0.13 | $0.07 |
- Q3 revenue decreased 14.8% year over year, while nine-month revenue increased 42.8%, primarily because the nine-month period included iSatori revenue.
- Q3 gross profit declined 23.9%, and gross margin decreased approximately 450 basis points. Nine-month gross profit increased 49.3%, with gross margin improving approximately 180 basis points.
- Q3 operating expenses increased 8.2% to $2.35 million, driven principally by general and administrative costs associated with integrating iSatori. Nine-month operating expenses increased 36.2% to $7.37 million.
- Q3 included a $0.36 million net loss, compared with $0.38 million of net income in the prior-year quarter. Nine-month net income increased 162.2% to $1.53 million.
- At September 30, 2016, cash was $1.99 million, accounts receivable were $4.05 million, inventory was $4.43 million, and total current assets were $10.70 million.
- Total liabilities were $6.44 million, including $3.10 million of notes payable and advances. Stockholders’ equity was $11.79 million.
- Current liabilities were $5.94 million, implying a current ratio of approximately 1.8x. The filing states net working capital was $4.76 million at September 30, 2016.
Cash flow, debt, and liquidity
- Net cash provided by operating activities was $0.36 million for the first nine months of 2016, compared with $0.52 million used in operations in the prior-year period.
- Investing activities used $19,592, primarily for property and equipment purchases.
- Financing activities provided $0.12 million, including a $520,000 draw on the revolving credit line and $404,261 of note repayments.
- Cash increased by $453,811 during the first nine months, from $1.53 million at December 31, 2015 to $1.99 million at September 30, 2016.
- The U.S. Bank revolving line had a $2.01 million balance, a $3.0 million commitment, an interest rate of 3.0% plus one-month LIBOR, and a maturity date of June 15, 2017. It was secured by eligible receivables and inventory.
- The U.S. Bank term loan had a balance of $1.05 million, a fixed interest rate of 3.6%, and a maturity date of August 15, 2018. Management stated that it expects to repay the credit-line borrowings and term-loan principal as soon as practicable.
- Management stated that anticipated 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 fell primarily because of lower iSatori revenue and the timing of the GNC annual franchise convention. Management estimated that approximately $1.3 million of shipments occurred in Q2 that historically would have been recognized in Q3.
- NDS revenue decreased 32.9% on an as-reported basis in Q3. After adjusting the prior-year period for vendor-funded discount accounting, NDS revenue decreased 26.2%.
- iSatori contributed $1.13 million of Q3 revenue and $6.15 million of nine-month revenue; it contributed no revenue to the Q3 2015 comparison and was not included for the full comparable nine-month period.
- The company changed its treatment of vendor-funded discounts for indirect GNC 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. Management states that the change reduces both revenue and selling and marketing expense without affecting operating or net income.
- General and administrative expense increased 32.4% in Q3 and 56.1% for the first nine months, primarily due to iSatori integration.
- Accounts receivable increased from $2.68 million at December 31, 2015 to $4.05 million at September 30, 2016, while inventory declined from $4.79 million to $4.43 million.
- The accumulated deficit improved from $20.81 million at December 31, 2015 to $19.28 million at September 30, 2016, reflecting year-to-date profitability.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative revenue or earnings guidance was provided. Management expects new products, expanded GNC distribution, international expansion, iSatori sales, and GNC’s planned sale of company-owned stores to franchisees to support future growth, but provides no assurance.
- NDS was not in compliance with certain four-quarter financial covenants under its U.S. Bank term loan and revolving line, principally because of lower Q3 revenue and higher post-merger operating expenses. The company received a waiver on or around November 11, 2016 for the period ended September 30, 2016, with no payment required.
- Future covenant breaches could result in a default, termination of the facilities, and acceleration of amounts owed, which management states could materially affect financial condition.
- The company is exposed to customer concentration and relies significantly on GNC, as well as competition, market demand, product performance, suppliers, personnel, and changing accounting requirements.
- The company is a defendant or participant in litigation concerning products containing Testofen. A related case had been dismissed, but the Ninth Circuit reversed dismissal of a false-advertising claim in June 2016, and the company expected the Ryan case to be reinstated. The filing does not provide a clear quantified exposure.
- A trademark dispute concerning Metis Nutrition was settled in August 2016, allowing use of the MET-RX trademark in certain circumstances.
- The company reported no impairment of long-lived assets, no uncertain-tax-position liability, no related-party transactions, and no defaults upon senior securities during the period.
- The company maintained a $689,000 net deferred tax asset and disclosed approximately $21.0 million of federal and $2.3 million of Colorado net operating loss carryforwards, subject to potential limitations.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2016. The filing was not subject to an external auditor attestation of internal controls.
Important facts for investors to verify
- Verify the sustainability of revenue growth after separating the iSatori acquisition effect, GNC shipment timing, and vendor-funded discount accounting changes.
- Monitor Q4 and future compliance with U.S. Bank covenant requirements and the June 2017 revolving-line maturity.
- Assess whether operating cash flow can fund debt repayment while supporting working capital, particularly accounts receivable and inventory.
- Review GNC concentration, iSatori integration costs, customer demand, and the effect of future product launches on gross margins.
- Review the status and potential financial exposure of the Testofen-related litigation and any subsequent developments.
- Consider potential dilution from 1,059,988 outstanding options and 110,620 outstanding warrants as of September 30, 2016.
- Confirm the impact and comparability of the vendor-funded discount accounting policy in subsequent filings.